OVERVIEW
NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products throughNIKE -owned retail stores and through digital platforms (which we refer to collectively as our "NIKE Direct" operations), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, "must-have" products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail. Through the Consumer Direct Acceleration we are focusing on creating the marketplace of the future through more premium, consistent and seamless consumer experiences, leading withNIKE Digital and our owned stores, as well as select strategic partners who share our marketplace vision. We have aligned our product creation and category organizations around a new consumer construct focused on Men's, Women's, Kids' and the Jordan Brand and continue to invest in data and analytics, demand sensing, insight gathering, inventory management and other areas to create an end-to-end technology foundation which will further accelerate our digital transformation. During fiscal 2021, we substantially completed a series of leadership and operating model changes to streamline and speed up strategic execution of the Consumer Direct Acceleration. During the first quarter of fiscal 2022 and the first quarter of fiscal 2021, the Company recognized an immaterial amount of related employee termination costs and, to a lesser extent, stock-based compensation expense. COVID-19 UPDATE The COVID-19 pandemic continues to create volatility in our business results and operations globally, causing us to transform the way we operate in order to better serve our consumers. During the first quarter of fiscal 2022, we continued to experience strong consumer demand with Revenues growing 16% and gross margin expanding 170 basis points compared to the prior year. However, during the first quarter of fiscal 2022, the majority ofNIKE Brand and Converse contract manufacturers inVietnam andIndonesia were subject to government mandated shutdowns due to COVID-19. These closures have, and are expected to continue to, significantly impact our previously planned inventory production for our upcoming holiday and spring seasons. As a result of these closures, we have lost approximately ten weeks of production. Although the timing remains uncertain and is subject to factors outside of our control, re-opening plans continue to be approved for factories inVietnam and we anticipate most factories will re-open in October. Currently, factories inIndonesia are open and operational. Once factories re-open we expect it will take several months for them to return to full production. For fiscal 2021, 51% ofNIKE Brand footwear and 30% ofNIKE Brand apparel was manufactured inVietnam , and 24% ofNIKE Brand footwear and less than 12% ofNIKE Brand apparel was manufactured inIndonesia . Additionally, the extended inventory transit times we experienced in fiscal 2021, due primarily to port congestion, transportation delays as well as labor and container shortages, worsened during the first quarter of fiscal 2022, negatively impacting our product availability, most prominently in our wholesale channel. We also experienced higher transportation and logistics costs as a result of this dynamic environment, which negatively impacted gross margin expansion in the first quarter of fiscal 2022. We expect the combination of factory closures and elevated transit times will continue to impact product availability leading to inventory shortages and will negatively impact revenue growth for the remainder of the fiscal year. In addition, we expect transportation and logistics costs will continue to be elevated as we navigate these supply chain constraints throughout the fiscal year. We expect all our geographies and Converse will continue to be impacted by these factors throughout fiscal 2022 with countries inAsia expected to be more significantly impacted in the second quarter of fiscal 2022 and others expected to experience a greater impact in the second half of fiscal 2022 due to higher levels of in-transit inventory at the end of the first quarter of fiscal 2022. To mitigate the impact across our business, our teams are continuing to leverage our operational playbook and taking actions where we can, including shifting production capacity to other countries, strategic use of air freight and employing a seasonless approach to products. Despite these short-term dynamics, our Consumer Direct Acceleration strategy continues to drive our business towards our long-term fiscal 2025 financial goals shared in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 . OurNIKE Direct business has continued its momentum in the first quarter, fueling our growth as we continue to navigate through the pandemic by leveraging our digital platforms with our store footprint to connect directly with the consumer.NIKE Brand Digital revenues grew 25% on a currency-neutral basis for the first quarter of fiscal 2022, even with improved physical traffic levels in most of our geographies compared to the prior year. During the quarter, we experienced an increase in comparable store sales in
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North America , EMEA and APLA primarily due to improved physical retail traffic, partially offset by a decline in comparable store sales inGreater China , in part due to ongoing marketplace dynamics and a COVID-19 resurgence during the first quarter of fiscal 2022. As ofOctober 1, 2021 , approximately 99% of our owned stores were open with some operating on reduced hours. During the quarter, we continued to invest in our digital transformation and brand campaigns as the world continues its return to sport. For the remainder of fiscal 2022, we will maintain our multi-year investment plans in order to transform our business for the future. We continue to monitor the ongoing and dynamic impacts of COVID-19, as well as guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. There may be developments outside our control that require us to adjust our operating plan, such as our assumption on the pace of re-opening and return to full production of factories inVietnam and the planned shift of production capacity to other countries following factory closures inVietnam andIndonesia . Such developments and other potential impacts of COVID-19, such as new or prolonged factory closures, higher inventory levels or inventory shortages in various markets, other adverse impacts on the global supply chain, revised payment terms with certain of our wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions, among other factors, could have material adverse impacts on our revenue growth as well as our overall profitability in future periods. FIRST QUARTER OVERVIEW For the first quarter of fiscal 2022,NIKE, Inc. Revenues increased 16% to$12.2 billion compared to the first quarter of fiscal 2021. On a currency-neutral basis, Revenues increased 12%. Net income was$1,874 million and diluted earnings per common share was$1.16 for the first quarter of fiscal 2022, compared to Net income of$1,518 million and diluted earnings per common share of$0.95 for the first quarter of fiscal 2021. Income before income taxes increased 23% compared to the first quarter of fiscal 2021, due to higher revenues and gross margin expansion, partially offset by higher selling and administrative expense. TheNIKE Brand, which represents over 90% ofNIKE, Inc. Revenues, increased 16% compared to the first quarter of fiscal 2021. On a currency-neutral basis,NIKE Brand revenues increased 12%, primarily driven by higher revenues inNorth America , APLA and EMEA. Additionally,NIKE Brand currency-neutral revenues were higher across footwear and apparel, as well as Men's, Women's, the Jordan Brand and Kids'. Revenues for Converse increased 12% and 7% compared to the first quarter of fiscal 2021, on a reported and currency-neutral basis, respectively, led by performance in Direct to consumer in bothNorth America andWestern Europe . Our effective tax rate was 11.0% for the first quarter of fiscal 2022, compared to 11.5% for the first quarter of fiscal 2021, primarily due to a more favorable impact from stock-based compensation and discrete items, such as the recognition of a reserve in the first quarter of fiscal 2021 related toAltera Corp. v. Commissioner, partially offset by a change in the proportion of earnings taxed in theU.S. During fiscal 2021, the transaction with Grupo SBF S.A. to purchase substantially all of ourNIKE Brand operations inBrazil closed. We remain committed to selling ourArgentina ,Chile andUruguay legal entities and granting distribution rights to third-party distributors. As such, the assets and liabilities of these entities have remained classified as held-for-sale on the Unaudited Condensed Consolidated Balance Sheets. For more information see Note 12 - Acquisitions and Divestitures within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. USE OF NON-GAAP FINANCIAL MEASURES Throughout this Quarterly Report on Form 10-Q, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues, currency-neutral revenues, as well as TotalNIKE Brand earnings before interest and taxes (EBIT),Total NIKE, Inc. EBIT and EBIT Margin, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). References to wholesale equivalent revenues are intended to provide context as to the total size of ourNIKE Brand market footprint if we had noNIKE Direct operations.NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to ourNIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. EBIT is calculated as Net Income before Interest expense (income), net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income. EBIT Margin is calculated as EBIT divided by totalNIKE, Inc. Revenues. Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues, currency-neutral revenues, EBIT and EBIT margin should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance withU.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. 22 --------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, (Dollars in millions, except per share data) 2021 2020 % CHANGE Revenues$ 12,248 $ 10,594 16 % Cost of sales 6,552 5,853 12 % Gross profit 5,696 4,741 20 % Gross margin 46.5 % 44.8 % Demand creation expense 918 677 36 % Operating overhead expense 2,654 2,298 15 % Total selling and administrative expense 3,572 2,975 20 % % of revenues 29.2 % 28.1 % Interest expense (income), net 57 65 - Other (income) expense, net (39) (14) - Income before income taxes 2,106 1,715 23 % Income tax expense 232 197 18 % Effective tax rate 11.0 % 11.5 % NET INCOME$ 1,874 $ 1,518 23 % Diluted earnings per common share$ 1.16 $ 0.95 22 % 23
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CONSOLIDATED OPERATING RESULTS REVENUES THREE MONTHS ENDED AUGUST 31, % CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES(1)NIKE, Inc. Revenues:NIKE Brand Revenues by: Footwear$ 7,718 $ 6,768 14 % 10 % Apparel 3,450 2,875 20 % 16 % Equipment 465 371 25 % 22 % Global Brand Divisions(2) 7 4 75 % 38 % Total NIKE Brand Revenues 11,640 10,018 16 % 12 % Converse 629 563 12 % 7 % Corporate(3) (21) 13 - - TOTALNIKE, INC. REVENUES$ 12,248 $ 10,594 16 % 12 % SupplementalNIKE Brand Revenues Details:NIKE Brand Revenues by: Sales to Wholesale Customers$ 6,943 $ 6,364 9 % 5 % Sales through NIKE Direct 4,690 3,650 28 % 25 % Global Brand Divisions(2) 7 4 75 % 38 % TOTAL NIKE BRAND REVENUES$ 11,640 $ 10,018 16 % 12 % (1)The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information. (2)Global Brand Divisions revenues are primarily attributable toNIKE Brand licensing businesses that are not part of a geographic operating segment. (3)Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within theNIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 On a currency-neutral basis,NIKE, Inc. Revenues increased 12% for the first quarter of fiscal 2022, driven by higher revenues in both theNIKE Brand and Converse. Higher revenues inNorth America , APLA, EMEA and Converse contributed approximately 6, 3, 2 and 1 percentage points toNIKE, Inc. Revenues, respectively. On a currency-neutral basis,NIKE Brand footwear revenues increased 10% in the first quarter of fiscal 2022, driven by higher revenues in the Jordan Brand, Women's, Men's and Kids'. Unit sales of footwear increased 5%, while higher average selling price (ASP) per pair contributed approximately 5 percentage points of footwear revenue growth, primarily due to higherNIKE Direct ASP, on a wholesale equivalent basis, as well as the favorable impact of growth in ourNIKE Direct business. Currency-neutralNIKE Brand apparel revenues, for the first quarter of fiscal 2022, increased 16%, driven by higher revenues in Men's, Women's and theJordan Brand. Unit sales of apparel increased 8% and higher ASP per unit contributed approximately 8 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price andNIKE Direct ASPs. On a reported basis,NIKE Direct revenues represented approximately 40% of our totalNIKE Brand revenues for the first quarter of fiscal 2022 compared to 36% for the first quarter of fiscal 2021. Digital commerce sales were$2.5 billion for the first quarter of fiscal 2022 compared to$1.9 billion for the first quarter of fiscal 2021. On a currency-neutral basis,NIKE Direct revenues increased 25%, driven by digital commerce sales growth of 25%, comparable store sales growth of 22%, in part due to improved physical retail traffic, and the addition of new stores. Comparable store sales, which exclude digital commerce sales, comprises revenues fromNIKE -owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales includes revenues from stores that were temporarily closed during the period as a result of COVID-19. Comparable store sales represents a performance measure that we believe is useful information for management and investors in understanding the performance of our establishedNIKE -owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable 24 --------------------------------------------------------------------------------
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store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled measures used by other companies. GROSS MARGIN THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2021 2020 % CHANGE Gross profit$ 5,696 $ 4,741 20 % Gross margin 46.5 % 44.8 % 170 bps For the first quarter of fiscal 2022, our consolidated gross margin was 170 basis points higher than the prior year period and primarily reflected the following factors: •Higher margin in ourNIKE Direct business, as we experienced higher promotional activity in the prior year due to COVID-19 (increasing gross margin approximately 160 basis points); •Higher mix of full-price sales, on a wholesale equivalent basis, (increasing gross margin approximately 60 basis points); •Favorable changes in net foreign currency exchange rates, including hedges, (increasing gross margin approximately 20 basis points); •HigherNIKE Brand product costs, on a wholesale equivalent basis, primarily due to increased freight costs (decreasing gross margin approximately 120 basis points); and •Lower other costs, in part due to the release of factory cancellation cost accruals occurring in the prior year, which was more than offset by lower storage costs and reduced inventory obsolescence in the first quarter of fiscal 2022, among other things, (increasing gross margin approximately 50 basis points). TOTAL SELLING AND ADMINISTRATIVE EXPENSE THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2021 2020 % CHANGE Demand creation expense(1) $ 918 $ 677 36 % Operating overhead expense 2,654 2,298 15 % Total selling and administrative expense$ 3,572 $ 2,975 20 % % of revenues 29.2 % 28.1 % 110 bps (1)Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary products, television, digital and print advertising and media costs, brand events and retail brand presentation. FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 Demand creation expense increased 36% for the first quarter of fiscal 2022 primarily due to higher spend against brand campaigns as we experienced marketplace closures in the prior year due to COVID-19, as well as continued investments in digital marketing to support heightened digital demand. Changes in foreign currency exchange rates increased Demand creation expense by approximately 3 percentage points. Operating overhead expense increased 15% primarily due to an increase in wage-related expenses, higher strategic technology investments andNIKE Direct variable costs. Changes in foreign currency exchange rates increased Operating overhead expense by approximately 2 percentage points. OTHER (INCOME) EXPENSE, NET THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2021 2020 Other (income) expense, net $ (39)$ (14) Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business. For the first quarter of fiscal 2022, Other (income) expense, net was relatively flat compared to the prior year.
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We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had favorable impacts of approximately$104 million on our Income before income taxes for the first quarter of fiscal 2022. INCOME TAXES THREE MONTHS ENDED AUGUST 31, 2021 2020 % CHANGE Effective tax rate 11.0 % 11.5 % (50) bps Our effective tax rate was 11.0% for the first quarter of fiscal 2022, compared to 11.5% for the first quarter of fiscal 2021, primarily due to a more favorable impact from stock-based compensation and discrete items, such as the recognition of a reserve in the first quarter of fiscal 2021 related toAltera Corp. v. Commissioner, partially offset by a change in the proportion of earnings taxed in theU.S. Refer to Note 5 - Income Taxes within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional information. 26 --------------------------------------------------------------------------------
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OPERATING SEGMENTS Our operating segments are evidence of the structure of the Company's internal organization. TheNIKE Brand segments are defined by geographic regions for operations participating inNIKE Brand sales activity. EachNIKE 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 theNIKE Brand are:North America ;Europe ,Middle East &Africa (EMEA);Greater China ; andAsia Pacific &Latin America (APLA), and include results for theNIKE and Jordan brands. The Company'sNIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable operating segment for the Company, and operates predominately in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to eachNIKE Brand entity in our geographic operating segments and 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 the use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses. The breakdown of Revenues is as follows:
THREE MONTHS ENDED
% CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES(1) North America$ 4,879 $ 4,225 15 % 15 % Europe, Middle East & Africa 3,307 2,910 14 % 8 % Greater China 1,982 1,780 11 % 1 % Asia Pacific & Latin America 1,465 1,099 33 % 31 % Global Brand Divisions(2) 7 4 75 % 38 % TOTALNIKE BRAND 11,640 10,018 16 % 12 % Converse 629 563 12 % 7 % Corporate(3) (21) 13 - - TOTALNIKE, INC. REVENUES$ 12,248 $ 10,594 16 % 12 % (1) The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information. (2) Global Brand Divisions revenues includeNIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. (3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within theNIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT, which represents Net income before Interest expense (income), net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income. As discussed in Note 11 - Operating Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments.
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The breakdown of earnings before interest and taxes is as follows:
THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2021 2020 % CHANGE North America$ 1,434 $ 1,302 10 % Europe, Middle East & Africa 875 692 26 % Greater China 701 688 2 % Asia Pacific & Latin America 481 280 72 % Global Brand Divisions (987) (853) -16 % TOTALNIKE BRAND (1) 2,504 2,109 19 % Converse 204 168 21 % Corporate (545) (497) -10 %
TOTAL
1,780 22 % EBIT margin(1) 17.7 % 16.8 % Interest expense (income), net 57 65 - TOTALNIKE, INC. INCOME BEFORE INCOME TAXES$ 2,106 $ 1,715 23 %
(1) Total
THREE MONTHS ENDED
% CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES Revenues by: Footwear$ 3,264 $ 2,957 10 % 10 % Apparel 1,430 1,125 27 % 27 % Equipment 185 143 29 % 29 % TOTAL REVENUES$ 4,879 $ 4,225 15 % 15 % Revenues by: Sales to Wholesale Customers$ 2,678 $ 2,719 -2 % -2 % Sales through NIKE Direct 2,201 1,506 46 % 46 % TOTAL REVENUES$ 4,879 $ 4,225 15 % 15 % EARNINGS BEFORE INTEREST AND TAXES$ 1,434 $ 1,302 10 % We believe there continues to be a meaningful shift in the way consumers shop for product and make purchasing decisions across each of our geographies. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and rapid delivery, all fueled by the shift toward digital and mono-brand experiences inNIKE Direct. We anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. Specifically inNorth America , we remain focused on building long-term momentum with our strategic wholesale customers, which offer a differentiated retail experience. Additionally, over the last three years we have significantly reduced the number of undifferentiated wholesale accounts. During fiscal 2021 and the first quarter of fiscal 2022, we took further steps towards account and channel consolidation by reprioritizing product allocation to benefitNIKE Direct and our differentiated strategic wholesale customers. We expect over the next two fiscal years, we will more aggressively accelerate these changes as we work to reprofile the shape of the marketplace and recapture wholesale revenue declines over time. FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 On a currency-neutral basis,North America revenues for the first quarter of fiscal 2022 increased 15%, due primarily to higher revenues in Women's, Men's, the Jordan Brand and Kids'.NIKE Direct revenues increased 46%, driven by strong digital sales growth of 43%, comparable store sales growth of 49%, in part due to improved physical retail traffic and the addition of new stores. Footwear revenues increased 10% on a currency-neutral basis, largely driven by significant growth in digital. Unit sales of footwear increased 4%, while higher ASP per pair contributed approximately 6 percentage points. Higher ASP per pair was primarily due to the favorable impact of growth in ourNIKE Direct business, as well as higherNIKE Direct ASPs, partially offset by lower full-price ASP. 28 --------------------------------------------------------------------------------
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On a currency-neutral basis, apparel revenues increased 27%, driven primarily by higher revenues in Men's and Women's. Unit sales of apparel increased 13%, while higher ASP per unit contributed approximately 14 percentage points. The increase in ASP per unit was primarily driven by higher full-price andNIKE Direct ASPs, as well as the favorable impact of growth in ourNIKE Direct business. Reported EBIT increased 10% as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased approximately 60 basis points primarily due to the favorable impact of growth in ourNIKE Direct business, as well as higher margins inNIKE Direct and a higher mix of full-price sales. This activity was partially offset by higher product costs as favorable impacts from product mix were more than offset by increased freight charges, as well as lower full-price ASP, net of discounts primarily due to shifts in product mix compared to the prior year. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Demand creation expense increased primarily as a result of higher advertising and marketing expense, as well as digital marketing investments and sports marketing costs. The increase in operating overhead expense reflected higher wage-related costs, as well as an increase in strategic technology investments.EUROPE ,MIDDLE EAST &AFRICA
THREE MONTHS ENDED
% CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES Revenues by: Footwear$ 1,983 $ 1,802 10 % 4 % Apparel 1,159 971 19 % 13 % Equipment 165 137 20 % 15 % TOTAL REVENUES$ 3,307 $ 2,910 14 % 8 % Revenues by: Sales to Wholesale Customers$ 2,224 $ 1,973 13 % 7 % Sales through NIKE Direct 1,083 937 16 % 10 % TOTAL REVENUES$ 3,307 $ 2,910 14 % 8 % EARNINGS BEFORE INTEREST AND TAXES $ 875$ 692 26 % FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 On a currency-neutral basis, EMEA revenues for the first quarter of fiscal 2022 increased 8%, due primarily to higher revenues in Men's, Women's and the Jordan Brand.NIKE Direct revenues increased 10% primarily due to comparable store sales growth of 16%, in part due to improved physical retail traffic, the addition of new stores and digital sales growth of 2%. Currency-neutral footwear revenues increased 4%, driven primarily by higher revenues in the Jordan Brand and Men's, partially offset by a decline in Women's. Unit sales of footwear increased 2%, while higher ASP per pair contributed approximately 2 percentage points. Higher ASP per pair was primarily due to lower off-price ASP, which was more than offset by higher full-price andNIKE Direct ASPs. Currency-neutral apparel revenues increased 13% due primarily to higher revenues in Men's and Women's. Unit sales of apparel increased 7%, while higher ASP per unit contributed approximately 6 percentage points, primarily due to higher full-price andNIKE Direct ASPs. Reported EBIT increased 26% due to higher revenues, gross margin expansion and lower selling and administrative expense as a percent of revenues. Gross margin increased approximately 260 basis points primarily due to higherNIKE Direct margins, favorable changes in standard foreign currency exchange rates and a higher mix of full-price sales, partially offset by higher product costs primarily due to increased freight charges. Selling and administrative expense increased due to higher operating overhead and demand creation expense. Higher operating overhead expense was primarily due to higher wage-related expenses. Higher demand creation expense was driven by higher advertising and marketing expenses.
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THREE MONTHS ENDED
% CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES Revenues by: Footwear$ 1,449 $ 1,251 16 % 6 % Apparel 476 478 0 % -9 % Equipment 57 51 12 % 3 % TOTAL REVENUES$ 1,982 $ 1,780 11 % 1 % Revenues by: Sales to Wholesale Customers$ 1,114 $ 964 16 % 5 % Sales through NIKE Direct 868 816 6 % -3 % TOTAL REVENUES$ 1,982 $ 1,780 11 % 1 % EARNINGS BEFORE INTEREST AND TAXES $ 701$ 688 2 % FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 On a currency-neutral basis,Greater China revenues for the first quarter of fiscal 2022 increased 1%, reflecting impacts from a COVID-19 resurgence and ongoing marketplace dynamics. The increase in revenues was primarily due to higher revenues in the Jordan Brand and Men's, partially offset by declines in Women's and Kids'.NIKE Direct revenues decreased 3% due to comparable store sales declines of 6% in part due to reduced physical retail traffic, as well as digital sales declines of 6%, partially offset by the addition of new stores. Currency-neutral footwear revenues increased 6% for the first quarter of fiscal 2022, driven primarily by higher revenues in Men's and the Jordan Brand. Unit sales of footwear increased 5%, while higher ASP per pair contributed approximately 1 percentage point of footwear revenue growth, driven by higher full-price ASP. Currency-neutral apparel revenues decreased 9% for the first quarter of fiscal 2022 due primarily to lower revenues in Women's. Unit sales of apparel decreased 4%, while lower ASP per unit reduced apparel revenues by approximately 5 percentage points, primarily due to lowerNIKE Direct ASP. Reported EBIT increased 2% as higher revenues more than offset gross margin contraction and higher selling and administrative expense. Gross margin decreased approximately 150 basis points reflecting higher product costs and lower off-price margin, which more than offset higher full-price ASP, net of discounts. Selling and administrative expense increased due to higher operating overhead and demand creation expense. Growth in operating overhead expense was primarily driven by higher wage-related and other administrative costs. Demand creation expense increased primarily due to higher advertising and marketing expense. 30 --------------------------------------------------------------------------------
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THREE MONTHS ENDED
% CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES Revenues by: Footwear$ 1,022 $ 758 35 % 33 % Apparel 385 301 28 % 26 % Equipment 58 40 45 % 44 % TOTAL REVENUES$ 1,465 $ 1,099 33 % 31 % Revenues by: Sales to Wholesale Customers $ 927$ 708 31 % 28 % Sales through NIKE Direct 538 391 38 % 36 % TOTAL REVENUES$ 1,465 $ 1,099 33 % 31 % EARNINGS BEFORE INTEREST AND TAXES $ 481$ 280 72 % As discussed previously, ourNIKE Brand business inBrazil transitioned to a distributor operating model during fiscal 2021 and ourNIKE Brand businesses inArgentina ,Chile andUruguay have remained classified as held-for-sale. The impacts of closing theBrazil transaction as well as classifying theArgentina ,Chile , andUruguay entities as held -for-sale in fiscal 2020 are included within Corporate and are not reflected in the APLA operating segment results. For more information see Note 12 - Acquisitions and Divestitures within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 On a currency-neutral basis, APLA revenues increased 31% for the first quarter of fiscal 2022. Territory revenue growth was led by a 144% increase in SOCO (which comprisesArgentina ,Chile andUruguay ), a 24% increase inJapan , a 86% increase inMexico and a 26% increase inKorea . Revenues increased primarily due to higher revenues in Men's and Women's.NIKE Direct revenues increased 36%, primarily due to digital sales growth of 62% and comparable store sales growth of 18%, in part due to improved physical retail traffic. Currency-neutral footwear revenues increased 33% for the first quarter of fiscal 2022 due primarily to higher revenues in Men's and Women's. Unit sales of footwear increased 19%, while higher ASP per pair contributed approximately 14 percentage points. Higher ASP per pair was driven by higherNIKE Direct ASP as well as higher full-price ASPs, due to lower discounts, and a higher mix of full-price sales. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory. Currency-neutral apparel revenues increased 26% for the first quarter of fiscal 2022 due primarily to higher revenues in Men's and Women's. Unit sales of apparel increased 12%, and higher ASP per unit contributed approximately 14 percentage points, driven by higher full-price ASP, reflecting lower discounts, and higherNIKE Direct ASP partially offset by a lower mix ofNIKE Direct sales. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory. Reported EBIT increased 72% for the first quarter of fiscal 2022 due to higher revenues, gross margin expansion and lower selling and administrative expense as a percent of revenues. Gross margin increased approximately 560 basis points primarily due to lower other costs, higherNIKE Direct margins, higher full-price ASP, primarily due to lower discounts, and a higher mix of full-price sales. The decrease in other costs was primarily due to the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments, as well as lower inventory obsolescence. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Higher demand creation expense was primarily due to higher digital marketing investments to support heightened digital demand. The increase in operating overhead expense was primarily due to an increase inNIKE Direct strategic technology investments, as well as higher wage-related expenses. GLOBAL BRAND DIVISIONS
THREE MONTHS ENDED
% CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES Revenues $ 7$ 4 75 % 38 % Earnings (Loss) Before Interest and Taxes $ (987)$ (853) -16 % 31
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Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for theNIKE Brand, as well as costs associated withNIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues includeNIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 Global Brand Divisions' loss before interest and taxes increased 16% for the first quarter of fiscal 2022 driven by higher operating overhead and higher demand creation expense. Higher operating overhead expense was primarily due to an increase in strategic technology investments. Higher demand creation expense was primarily due to higher advertising and marketing expense. CONVERSE
THREE MONTHS ENDED
% CHANGE EXCLUDING (Dollars in millions) 2021 2020 % CHANGE CURRENCY CHANGES Revenues by: Footwear $ 567$ 513 11 % 6 % Apparel 24 22 9 % -1 % Equipment 9 9 0 % -6 % Other(1) 29 19 53 % 55 % TOTAL REVENUES $ 629$ 563 12 % 7 % Revenues by: Sales to Wholesale Customers $ 369$ 373 -1 % -6 % Sales through Direct to Consumer 231 171 35 % 32 % Other(1) 29 19 53 % 55 % TOTAL REVENUES $ 629$ 563 12 % 7 % EARNINGS BEFORE INTEREST AND TAXES $ 204$ 168 21 % (1)Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks inJapan and accordingly do not earn revenues inJapan . FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 On a currency-neutral basis, Converse revenues increased 7% for the first quarter of fiscal 2022 driven by revenue growth inNorth America and licensee markets, partially offset by declines inAsia andWestern Europe . Wholesale revenues decreased 6%, in part due to supply chain constraints, while Direct to consumer revenues increased 32%, as strong direct to consumer sales growth acrossNorth America andWestern Europe more than offset declines inAsia . Combined unit sales within the wholesale and direct to consumer channels decreased 8%, while ASP increased 14%, primarily due to higher full-price ASP, due to lower discounts and growth in direct to consumer. Reported EBIT increased 21%, driven by higher revenues and gross margin expansion, partially offset by higher selling and administrative expense. Gross margin increased approximately 340 basis points as higher product costs due to increased duty and freight charges were more than offset by higher margins in our direct to consumer business, lower other costs and growth in licensee revenues. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Demand creation expense increased primarily due to higher advertising and marketing expense. Operating overhead expense increased primarily due to higher administrative expenses. 32 --------------------------------------------------------------------------------
Table of Contents CORPORATE THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2021 2020 % CHANGE Revenues $ (21)$ 13 - Earnings (Loss) Before Interest and Taxes $ (545)$ (497) -10 % Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within theNIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses. In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within theNIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments. FIRST QUARTER OF FISCAL 2022 COMPARED TO FIRST QUARTER OF FISCAL 2021 Corporate's loss before interest and taxes increased$48 million for the first quarter of fiscal 2022, primarily due to the following: •an unfavorable change of$33 million , primarily due to higher operating overhead expense driven by higher wage-related costs; •an unfavorable change in net foreign currency gains and losses of$13 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net; and •an unfavorable change of$2 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to theNIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin. FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES OVERVIEW As a global company with significant operations outsidethe United States , in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows intoU.S. Dollars. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material toNIKE, Inc. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Unaudited Condensed Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. As of and for the three months endedAugust 31, 2021 , there have been no material changes to the Company's hedging program or strategy from what was disclosed within the Annual Report on Form 10-K. Refer to Note 4 - Fair Value Measurements and Note 8 - Risk Management and Derivatives in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. For additional information about our Foreign Currency Exposures and Hedging Practices refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 .
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TRANSACTIONAL EXPOSURES We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are: •Product Costs - Product purchases denominated in currencies other than the functional currency of the transacting entity and factory input costs from the foreign currency adjustments program with certain factories. •Non-Functional Currency Denominated External Sales - A portion of ourNIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure. •Other Costs - Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. •Non-Functional Currency Denominated Monetary Assets and Liabilities - Our global subsidiaries have various monetary assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations. MANAGING TRANSACTIONAL EXPOSURES Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements. Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement and embedded derivative contracts are not formally designated as hedging instruments and are recognized in Other (income) expense, net. TRANSLATIONAL EXPOSURES Many of our foreign subsidiaries operate in functional currencies other than theU.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries intoU.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets intoU.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a benefit of approximately$382 million for the three months endedAugust 31, 2021 and a detriment of approximately$111 million for the three months endedAugust 31, 2020 . The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a benefit of approximately$117 million for the three months endedAugust 31, 2021 and a detriment of approximately$29 million for the three months endedAugust 31, 2020 . Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management has concluded ourArgentina subsidiary within our APLA operating segment is operating in a hyper-inflationary market. As a result, beginning in the second quarter of fiscal 2019, the functional currency of ourArgentina subsidiary changed from the local currency to theU.S. Dollar. As of and for the three months endedAugust 31, 2021 , this change did not have a material impact on our results of operations or financial condition and we do not anticipate it will have a material impact in future periods based on current rates. MANAGING TRANSLATIONAL EXPOSURES To minimize the impact of translating foreign currency denominated revenues and expenses intoU.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchaseU.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of theseU.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting underU.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of theseU.S. Dollar investments. The combination of the purchase and sale of theU.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase ofU.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges. We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had a favorable impact of approximately$104 million on our Income before income taxes for the three months endedAugust 31, 2021 . 34 --------------------------------------------------------------------------------
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LIQUIDITY AND CAPITAL RESOURCES CASH FLOW ACTIVITY Cash provided (used) by operations was an inflow of$1,111 million for the first three months of fiscal 2022, compared to$882 million for the first three months of fiscal 2021. Net income, adjusted for non-cash items, generated$2,076 million of operating cash inflow for the first three months of fiscal 2022, compared to$1,606 million for the first three months of fiscal 2021. The net change in working capital and other assets and liabilities resulted in a decrease to Cash provided (used) by operations of$965 million for the first three months of fiscal 2022 compared to a decrease of$724 million for the first three months of fiscal 2021. The net change in working capital compared to the prior year was driven by changes in Accounts payable and Inventories for the first three months of fiscal 2022, in part due to supply chain constraints which caused higher levels of in-transit inventory. This activity was partially offset by a$1,026 million change in Accounts receivable, primarily due to the timing of marketplace recovery from store closures and resumption of wholesale shipments in the prior year due to COVID-19. Cash provided (used) by investing activities was an inflow of$501 million for the first three months of fiscal 2022, compared to an outflow of$889 million for the first three months of fiscal 2021, primarily driven by the net change in short-term investments. For the first three months of fiscal 2022, the net change in short-term investments (including sales, maturities and purchases) resulted in a cash inflow of$583 million compared to a cash outflow of$715 million for the first three months of fiscal 2021. Cash provided (used) by financing activities was an outflow of$743 million for the first three months of fiscal 2022 compared to$248 million for the first three months of fiscal 2021. The increased outflow in the first three months of fiscal 2022 was driven by our resumption of the share repurchase program in the fourth quarter of fiscal 2021, resulting in$752 million share repurchases for the first three months of fiscal 2022 compared to no share repurchases in the first three months of fiscal 2021. During the first three months of fiscal 2022, we repurchased 4.8 million shares ofNIKE's Class B Common Stock for$742.3 million (an average price of$155.30 per share) under the four-year,$15 billion share repurchase program approved by the Board of Directors inJune 2018 . As ofAugust 31, 2021 , we had repurchased 54.8 million shares at a cost of approximately$5.4 billion (an average price of$98.74 per share) under this program. We continue to expect funding of share repurchases will come from operating cash flows and excess cash. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions. CAPITAL RESOURCES OnJuly 23, 2019 , we filed a shelf registration statement (the "Shelf") with theU.S. Securities and Exchange Commission (SEC) which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires onJuly 23, 2022 . As ofAugust 31, 2021 , our committed credit facilities were unchanged from the information previously reported on Form 10-K for the fiscal year endedMay 31, 2021 . We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation andMoody's Investor Services , respectively. Any changes to these ratings could result in interest rate and facility fee changes. As ofAugust 31, 2021 , we were in full compliance with the covenants under our facilities and believe it is unlikely we will fail to meet any of the covenants in the foreseeable future. As ofAugust 31, 2021 andMay 31, 2021 , no amounts were outstanding under our committed credit facilities. Liquidity was also provided by our$3 billion commercial paper program. As of and for the three months endedAugust 31, 2021 , we did not have any borrowings outstanding under our$3 billion program. We may continue to issue commercial paper or other debt securities depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation andMoody's Investor Services , respectively. To date, in fiscal 2022, we have not experienced difficulty accessing the credit markets; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. As ofAugust 31, 2021 , we had cash, cash equivalents and short-term investments totaling$13.7 billion , primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds,U.S. government sponsored enterprise obligations,U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as ofAugust 31, 2021 , the weighted average days to maturity of our cash equivalents and short-term investments portfolio was 55 days. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future.
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We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital inthe United States , we may determine to repatriate indefinitely reinvested foreign funds or raise capital inthe United States through debt. Given our existing structure, if we were to repatriate indefinitely reinvested foreign earnings, we would be required to accrue and pay withholding taxes in certain foreign jurisdictions. OFF-BALANCE SHEET ARRANGEMENTS As ofAugust 31, 2021 , we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. CONTRACTUAL OBLIGATIONS There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 . NEW ACCOUNTING PRONOUNCEMENTS There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 . CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. 36 --------------------------------------------------------------------------------
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