NIKE, Inc. - 10-Q filing on 2014-04-07

Fair Value Measurements

9 Months Ended

Feb. 28, 2014

NOTE 5 — Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the FASB that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach).

The levels of hierarchy are described below:


•	Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


•	Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.

Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include an analysis of period-over-period fluctuations and comparison to another independent pricing vendor.

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of February 28, 2014 and May 31, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.



	As of February 28, 2014
	Fair Value Measurements Using						Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value		Balance Sheet Classification
ASSETS
Derivatives:
Foreign exchange forwards and options⁽¹⁾	$	—	$	120	$	—	$	120	Other current assets and other long-term assets
Embedded derivatives	—		1		—		1		Other current assets
Interest rate swap contracts	—		7		—		7		Other long-term assets
Total derivatives	—		128		—		128
Available-for-sale securities:
U.S. Treasury securities	—		—		—		—		Cash and equivalents
U.S. Agency securities	—		—		—		—		Cash and equivalents
Commercial paper and bonds	—		150		—		150		Cash and equivalents
Money market funds	—		870		—		870		Cash and equivalents
U.S. Treasury securities	1,474		—		—		1,474		Short-term investments
U.S. Agency securities	—		868		—		868		Short-term investments
Commercial paper and bonds	—		823		—		823		Short-term investments
Non-marketable preferred stock	—		—		6		6		Other long-term assets
Total available-for-sale securities	1,474		2,711		6		4,191
TOTAL ASSETS	$	1,474	$	2,839	$	6	$	4,319
LIABILITIES
Derivatives:
Foreign exchange forwards and options⁽¹⁾	$	—	$	116	$	—	$	116	Accrued liabilities and other long-term liabilities
Embedded derivatives	—		1		—		1		Accrued liabilities
TOTAL LIABILITIES	$	—	$	117	$	—	$	117

(1)

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



	As of May 31, 2013
	Fair Value Measurements Using						Assets/Liabilities at Fair Value
(In millions)	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value		Balance Sheet Classification
ASSETS
Derivatives:
Foreign exchange forwards and options⁽¹⁾	$	—	$	278	$	—	$	278	Other current assets and other long-term assets
Interest rate swap contracts	—		11		—		11		Other current assets and other long-term assets
Total derivatives	—		289		—		289
Available-for-sale securities:
U.S. Treasury securities	425		—		—		425		Cash and equivalents
U.S. Agency securities⁽²⁾	—		395		—		395		Cash and equivalents
Commercial paper and bonds⁽²⁾	—		660		—		660		Cash and equivalents
Money market funds	—		836		—		836		Cash and equivalents
U.S. Treasury securities	1,583		—		—		1,583		Short-term investments
U.S. Agency securities⁽²⁾	—		631		—		631		Short-term investments
Commercial paper and bonds⁽²⁾	—		414		—		414		Short-term investments
Non-marketable preferred stock	—		—		5		5		Other long-term assets
Total available-for-sale securities	2,008		2,936		5		4,949
TOTAL ASSETS	$	2,008	$	3,225	$	5	$	5,238
LIABILITIES
Derivatives:
Foreign exchange forwards and options⁽¹⁾	$	—	$	34	$	—	$	34	Accrued liabilities and other long-term liabilities
TOTAL LIABILITIES	$	—	$	34	$	—	$	34

(1)

The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. The Company elects to record the gross assets and liabilities of its derivative financial instruments in the consolidated balance sheets. If the derivative financial instruments had been netted in the consolidated balance sheets, the asset and liability positions each would have been reduced by $34 million. No material amounts of collateral were received or posted on the Company’s derivative assets and liabilities as of May 31, 2013.


(2)	Amounts have been revised to reflect proper classification between U.S. Agency securities and commercial paper and bonds.

Derivative financial instruments include foreign exchange forwards and options, embedded derivatives, and interest rate swap contracts. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations, and interest rates, and considers nonperformance risk of the Company and that of its counterparties. Adjustments relating to these nonperformance risks were not material at February 28, 2014 or May 31, 2013. Refer to Note 9 — Risk Management and Derivatives for additional detail.

Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper, and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2).

The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These investments are valued using internally developed models with unobservable inputs. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the nine months ended February 28, 2014 and the year ended May 31, 2013.

No transfers among the levels within the fair value hierarchy occurred during the nine months ended February 28, 2014 or the year ended May 31, 2013.

As of February 28, 2014 and May 31, 2013, the Company had no assets or liabilities that were required to be measured at fair value on a non-recurring basis.

Short-Term Investments

As of February 28, 2014 and May 31, 2013, short-term investments consisted of available-for-sale securities. As of February 28, 2014, the Company held $2,303 million of available-for-sale securities with maturity dates within one year from the purchase date and $862 million with maturity dates over one year and less than five years from the purchase date within short-term investments. As of May 31, 2013, the Company held $2,229 million of available-for-sale securities with maturity dates within one year from purchase date and $399 million with maturity dates over one year and less than five years from purchase date within short-term investments.

Short-term investments classified as available-for-sale consist of the following at fair value:



	As of February 28,		As of May 31,
(In millions)	2014		2013
Available-for-sale securities:
U.S. Treasury and Agency	$	2,342	$	2,214
Commercial paper and bonds	823		414
TOTAL AVAILABLE-FOR-SALE SECURITIES	$	3,165	$	2,628

Included in interest expense (income), net was interest income related to cash and equivalents and short-term investments of $3 million and $6 million for each of the three month periods ended February 28, 2014 and 2013, respectively, and $9 million and $20 million for each of the nine month periods ended February 28, 2014 and 2013, respectively.

Financial Assets and Liabilities Not Recorded at Fair Value

The Company’s long-term debt is recorded at adjusted cost, net of amortized premiums and discounts and interest rate swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments (Level 2). The fair value of the Company’s long-term debt, including the current portion, was approximately $1,131 million at February 28, 2014 and $1,219 million at May 31, 2013.

The carrying amounts reflected in the consolidated balance sheets for notes payable approximate fair value.