Nike 2016 Annual Report Download - page 68

PART II
by a factory through the date the purchase price is no longer subject to foreign
currency fluctuations.
In addition, the Company has entered into certain other contractual
agreements which have payments that are indexed to currencies that are not
the functional currency of either substantial party to the contracts. These
payment terms expose NIKE to variability in foreign exchange rates and
create embedded derivative contracts that must be bifurcated from the
related contract and recorded at fair value as derivative assets or liabilities on
the Consolidated Balance Sheets with their corresponding changes in fair
value recognized in Other (income) expense, net until each payment is settled.
At May 31, 2016, the notional amount of all embedded derivatives
outstanding was approximately $282 million.
Credit Risk
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to hedging instruments. The
counterparties to all derivative transactions are major financial institutions with
investment grade credit ratings. However, this does not eliminate the
Company’s exposure to credit risk with these institutions. This credit risk is
limited to the unrealized gains in such contracts should any of these
counterparties fail to perform as contracted. To manage this risk, the
Company has established strict counterparty credit guidelines that are
continually monitored.
The Company’s derivative contracts contain credit risk related contingent
features designed to protect against significant deterioration in counterparties’
creditworthiness and their ultimate ability to settle outstanding derivative
contracts in the normal course of business. The Company’s bilateral credit
related contingent features generally require the owing entity, either the
Company or the derivative counterparty, to post collateral for the portion of
the fair value in excess of $50 million should the fair value of outstanding
derivatives per counterparty be greater than $50 million. Additionally, a certain
level of decline in credit rating of either the Company or the counterparty could
also trigger collateral requirements. As of May 31, 2016, the Company was in
compliance with all credit risk-related contingent features and had derivative
instruments with credit risk-related contingent features in a net liability position
of $3 million. Accordingly, the Company was not required to post any
collateral as a result of these contingent features. Further, as of May 31, 2016,
the Company had received $105 million of cash collateral from various
counterparties to its derivative contracts (refer to Note 6 — Fair Value
Measurements). Given the considerations described above, the Company
considers the impact of the risk of counterparty default to be immaterial.
NOTE 17 — Operating Segments and Related Information
The Company’s operating segments are evidence of the structure of the
Company’s internal organization. The NIKE Brand segments are defined by
geographic regions for operations participating in NIKE Brand sales activity.
Each NIKE Brand geographic segment operates predominantly in one
industry: the design, development, marketing and selling of athletic footwear,
apparel and equipment. The Company’s reportable operating segments for
the NIKE Brand are: North America, Western Europe, Central & Eastern
Europe, Greater China, Japan and Emerging Markets, and include results for
the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand Direct to
Consumer operations are managed within each geographic operating
segment. Converse is also a reportable segment for the Company, and
operates in one industry: the design, marketing, licensing and selling of casual
sneakers, apparel and accessories.
Global Brand Divisions is included within the NIKE Brand for presentation
purposes to align with the way management views the Company. Global
Brand Divisions primarily represent NIKE Brand licensing businesses that are
not part of a geographic operating segment, and demand creation, operating
overhead and product creation and design expenses that are centrally
managed for the NIKE Brand.
Corporate consists largely of unallocated general and administrative
expenses, including expenses associated with centrally managed
departments; depreciation and amortization related to the Company’s
headquarters; unallocated insurance, benefit and compensation programs,
including stock-based compensation; and certain foreign currency gains and
losses, including certain hedge gains and losses.
The primary financial measure used by the Company to evaluate performance
of individual operating segments is earnings before interest and taxes
(commonly referred to as “EBIT”), which represents Net income before
Interest expense (income), net and Income tax expense in the Consolidated
Statements of Income.
As part of the Company’s centrally managed foreign exchange risk
management program, standard foreign currency rates are assigned twice
per year to each NIKE Brand entity in the Company’s geographic operating
segments and to Converse. These rates are set approximately nine and
twelve months in advance of the future selling seasons to which they relate
(specifically, for each currency, one standard rate applies to the fall and
holiday selling seasons and one standard rate applies to the spring and
summer selling seasons) based on average market spot rates in the calendar
month preceding the date they are established. Inventories and Cost of sales
for geographic operating segments and Converse reflect use of these
standard rates to record non-functional currency product purchases in the
entity’s functional currency. Differences between assigned standard foreign
currency rates and actual market rates are included in Corporate, together
with foreign currency hedge gains and losses generated from the Company’s
centrally managed foreign exchange risk management program and other
conversion gains and losses.
Accounts receivable, net,Inventories and Property, plant and equipment, net
for operating segments are regularly reviewed by management and are
therefore provided below. Additions to long-lived assets as presented in the
following table represent capital expenditures.
Certain prior year amounts have been reclassified to conform to fiscal 2016
presentation.
NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 121
FORM 10-K