Nike 2016 Annual Report Download - page 66

PART II
The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2016, 2015 and 2014:
(In millions)
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivatives(1)
Amount of Gain (Loss)
Reclassified From Accumulated
Other Comprehensive Income into Income(1)
Year Ended May 31, Location of Gain (Loss)
Reclassified From Accumulated Other
Comprehensive Income Into Income
Year Ended May 31,
2016 2015 2014 2016 2015 2014
Derivatives designated as cash flow hedges:
Foreign exchange forwards and options $ 90 $ (202) $ (48) Revenues $ (88) $ (95) $ 14
Foreign exchange forwards and options (57) 1,109 (78) Cost of sales 586 220 12
Foreign exchange forwards and options — — 4 Total selling and administrative expense — — —
Foreign exchange forwards and options (25) 497 (21) Other (income) expense, net 219 136 10
Interest rate swaps (83) 76 — Interest expense (income), net — — —
Total designated cash flow hedges (75) 1,480 (143) 717 261 36
Derivatives designated as net investment hedges:
Foreign exchange forwards and options $ — $ — $ — Other (income) expense, net $ — $ — $ —
(1) For the years ended May 31, 2016, 2015 and 2014, the amounts recorded in Other (income) expense, net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges
because the forecasted transactions were no longer probable of occurring were immaterial.
Amount of Gain (Loss) Recognized in
Income on Derivatives
Location of Gain (Loss) Recognized
in Income on Derivatives
Year Ended May 31,
(In millions) 2016 2015 2014
Derivatives designated as fair value hedges:
Interest rate swaps(1) $ 2 $ 5 $ 5 Interest expense (income), net
Derivatives not designated as hedging instruments:
Foreign exchange forwards and options (68) 611 (75) Other (income) expense, net
Embedded derivatives $ (2) $ (1) $ (1) Other (income) expense, net
(1) All interest rate swaps designated as fair value hedges meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the
fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail.
Refer to Note 6 — Fair Value Measurements for a description of how the
above financial instruments are valued and Note 14 — Accumulated Other
Comprehensive Income and the Consolidated Statements of Shareholders’
Equity for additional information on changes in Accumulated other
comprehensive income for the years ended May 31, 2016, 2015 and 2014.
Cash Flow Hedges
The purpose of the Company’s foreign exchange risk management program
is to lessen both the positive and negative effects of currency fluctuations on
the Company’s consolidated results of operations, financial position and cash
flows. Foreign currency exposures that the Company may elect to hedge in
this manner include product cost exposures, non-functional currency
denominated external and intercompany revenues, selling and administrative
expenses, investments in U.S. Dollar-denominated available-for-sale debt
securities and certain other intercompany transactions.
Product cost exposures are primarily generated through non-functional
currency denominated product purchases and the foreign currency
adjustment program described below. NIKE entities primarily purchase
products in two ways: (1) Certain NIKE entities purchase product from the
NIKE Trading Company (“NTC”), a wholly owned sourcing hub that buys
NIKE branded products from third party factories, predominantly in U.S.
Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the
product to NIKE entities in their respective functional currencies. When the
NTC sells to a NIKE entity with a different functional currency, the result is a
foreign currency exposure for the NTC. (2) Other NIKE entities purchase
product directly from third party factories in U.S. Dollars. These purchases
generate a foreign currency exposure for those NIKE entities with a functional
currency other than the U.S. Dollar.
The Company operates a foreign currency adjustment program with certain
factories. The program is designed to more effectively manage foreign
currency risk by assuming certain of the factories’ foreign currency
exposures, some of which are natural offsets to the Company’s existing
foreign currency exposures. Under this program, the Company’s payments
to these factories are adjusted for rate fluctuations in the basket of currencies
(“factory currency exposure index”) in which the labor, materials and overhead
costs incurred by the factories in the production of NIKE branded products
(“factory input costs”) are denominated. For the portion of the indices
denominated in the local or functional currency of the factory, the Company
may elect to place formally designated cash flow hedges. For all currencies
within the indices, excluding the U.S. Dollar and the local or functional
currency of the factory, an embedded derivative contract is created upon the
factory’s acceptance of NIKE’s purchase order. Embedded derivative
contracts are separated from the related purchase order, as further described
within the Embedded Derivatives section below.
The Company’s policy permits the utilization of derivatives to reduce its
foreign currency exposures where internal netting or other strategies cannot
be effectively employed. Typically, the Company may enter into hedge
contracts starting up to 12 to 24 months in advance of the forecasted
transaction and may place incremental hedges up to 100% of the exposure
by the time the forecasted transaction occurs. The total notional amount of
outstanding foreign currency derivatives designated as cash flow hedges
was $11.5 billion as of May 31, 2016.
As of May 31, 2016, the Company had a series of forward-starting interest
rate swap agreements with a total outstanding notional amount of $1.5 billion.
These instruments were designated as cash flow hedges of the variability in
the expected cash outflows of interest payments on future debt due to
changes in benchmark interest rates. During the second quarter of fiscal
2016, the Company terminated certain forward-starting interest rate swaps
with a total notional amount of $1 billion in connection with the October 29,
2015 debt issuance (refer to Note 8 — Long-Term Debt). Upon termination of
these forward-starting swaps, the Company received a cash payment from
the related counterparties of $34 million, which was recorded in Accumulated
other comprehensive income and will be released through Interest expense
(income), net as interest payments are made over the term of the issued debt.
NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 119
FORM 10-K