The Financial statements for Nike, Inc. are presented in Appendix C at the end of the text. The following additional information (in thousands) is available. I need help with letters A-M.

17 Financial Statement Analysis Accounts receivable at May 31, 2008 Inventories at May 31, 2008 Total assets at May 31, 2008 Stockholders' equity at May 31, 2008 2,884 2,357 13,249 8,693 Instructions 1. Determine the following measures for the fiscal years ended May 31, 2011 (fiscal 2010 and May 31, 2010 (fiscal 2009), rounding to one decimal place. a. Working capital b. Current ratio c. Quick ratio d. Accounts receivable turnover e. Number of days' sales in receivables f. Inventory turnover g. Number of days' sales in inventory h. Ratio of liabilities to stockholders' equity i. Ratio of net sales to assets j. Rate earned on total assets, assuming interest expense is $4 million for the year ending May 31, 2011, and $6 million for the year ending May 31, 2010 k. Rate earned on common stockholders' equity l. Price-earnings ratio, assuming that the market price was $75.70 per share on May 31, 2011, and $73.50 per share on May 31, 2010 m. Percentage relationship of net income to net sales 2. What conclusions can be drawn from these analyses? ojects CP 17-1 Analysis of financing corporate growth Assume that the president of Freeman Industries Inc. made the following statement in the Annual Report to Shareholders: "The founding family and majority shareholders of the company do not believe in using debt to finance future growth. The founding family learned from hard experience during Prohibition and the Great Depression that debt can cause loss of flexibility and eventual loss of corporate control. The company will not place itself at such risk. As such, all future growth will be financed either by stock sales to the public or by internally generated resources." Financial Statement Analysls 800 Chapter 17 Summary of Analytical Measures EXHIBIT 10 Use Method of Computation Current Assets- Current Liabilities Current Liabilities To indicate the ability to meet c maturing obligations (measures soly Liquidity and solvency measures To indicate instant debt-paying ability Current Liabilities To assess the efficiency in collecting receivables and in the management of credit (measures liquidity) Average Accounts Receivable Average Accounts Receivable Average Daily Sales Cost of Goods Sold Average Inventory Average Inventory Average Daily Cost of Goods Sold Fixed Assets (net) Long-Term Liabilities Total Liabilities Total Stockholders'Equity Income Before Income Tax +Interest Expense Interest Expense Turnover Numbers of Days'Sales in To assess the efficiency in the mana of inventory (measures liquidity) Inventory Turnover Number of Days'Sales in Inventory To indicate the margin of safety to long-term creditors (measures solvency) Ratio of Fixed Assets to Long-Term Liabilities To indicate the margin of safety to creditors (measures solvency) Ratio of Liabilities to Stockholders' Equity Number of Times Interest Charges Are Earned To assess the risk to debtholders in terms of number of times interest charges were earned (measures solvency) To assess the risk to preferred stockholders in terms of the number of times preferred dividends were earned (measures solvency) Number of Times Preferred Dividends Are Earned Preferred Dividends Profitability measures: Ratio of Net Sales to Assets To assess the effectiveness in the use of assets Average Total Assets (excluding long-term investments) Net Income + Interest Expense Average Total Assets Net Income Rate Earned on To assess the profitability of the assets Rate Earned on To assess the profitability of the investmen by stockholders Stockholders' Equity Rate Earned on Common Stockholders' Equity Earnings per Share (EPS) on Average Total Stockholders Equity Net Income- Preferred Dividends Average Common Stockholders'Equity Net Income- Preferred Dividends Shares of Common Stock Outstanding Market Price per Share of Common Stock Earnings per Share on Common Stock Dividends on Common Stock Shares of Common Stock Outstanding Dividends per Share of Common Stock Market Price per Share of Common Stock To assess the profitability of the investmen by common stockholders Common Stock Price-Earnings (P/E) Ratio To indicate future earnings prospects, based on the relationship between market value of common stock and earnings Dividends per Share To indicate the extent to which earnings are being distributed to common st Dividend Yield To indicate the rate of return to c stockholders in terms of dividends NIKE INC FORM 10-K (Annual Report) Filed 07/22/11 for the Period Ending 05/31/11 ONE BOWERMAN DR BEAVERTON, OR 97005-6453 Address Telephone 5036713173 CIK 0000320187 Symbol NKE SIC Code 3021 - Rubber and Plastics Footwear Industry Footwear Sector Consumer Cyclical Fiscal Year 05/31 sS(bl of the Securities Exchange Act of 1934. For the fiscal year e: Nike, Inc. Annual Report pursuant to Section 13 or y 31, 2011. United States Securities and Exchange Commission, Washington D.C. 20549 ended Table of Contents NIKE, INC. CONSOLIDATED BALANCE SHEETS 31 Current assets ASSETS Cash and equivalents Short-term investments (Note 6) Accounts receivable, net (Note 1) Inventories (Notes 1 and 2) Deferred income taxes (Note 9) Prepaid expenses and other current assets $1955 3079 2583 2067 2,650 2,041 249 873 10,959 3,138 2,715 312 594 11,297 2,115 487 205 Total current assets Property, plant and equipment, net (Note 3) Identifiable intangible assets, net (Note 4) Goodwill (Note 4) Deferred income taxes and other assets (Notes 9 and 17) 467 188 873 419 894 Total assets 998 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Current portion of long-term debt (Note 8) Notes payable (Note 7) Accounts payable (Note 7) Accrued liabilities (Notes 5 and 17) Income taxes payable (Note 9) S 200 $ 7 187 1.469 1985 139 1255 1904 59 364 3,958 276 921 Total current liabilities 446 Long-term debt (Note 8) Deferred income taxes and other liabilities (Notes 9 and 17) Commitments and contingencies (Note 15) Redeemable Preferred Stock (Note 10) Shareholders' equity 855 Common stock at stated value (Note 11): Class A convertible-90 and 90 shares outstanding Class B -378 and 394 shares outstanding 3.9443441 Capital in excess of stated value Accumulated other comprehensive income (Note 14) Retained earnings 215 9754 $14,998 $14419 95 9,843 Total shareholders' equity Total liabilities and shareholders' equity Table of Contents NIKE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended May 31 Cash provided by operations Net income $2,133 $ 1907 $ 1487 335 (76) Income charges (credits) not affecting cash: (294) Deferred income taxes Stock-based compensation (Note 11) Impairment of goodwill, intangibles and other assets (Note 4) Amortization and other Changes in certain working capital components and other assets and liabilities excluding the 159 23 72 48 182 285 impact of acquisition and divestitures: (273) (551) (35) (238 Increase) decrease in accounts receivable 32 14 (Increase) decrease in inventories (Increase) decrease in prepaid expenses and other current assets Increase (decrease) in accounts payable, accrued liabilities and income taxes payable 151297(220) 3,164 1,812 1,736 Cash provided by operations Cash used by investing activities: (7,616) 4313 2,766 (3,724) 2334 (2,909) 1,280 1,110 Purchases of short-term investments Maturities of short-term investments Sales of short-term investments Additions to property, plant and equipment Disposals of property, plant and equipment 453 (335) 10 (30) Increase in other assets, net of other liabilities Settlement of net investment hedges (798) (1.021) 1,268 (1,268) Cash used by investing activities Cash used by financing activities: Reductions in long-term debt, including current portion Increase (decrease) in notes payable Proceeds from exercise of stock options and other stock issuances Excess tax benefits from share-based (32) (205) 364 187 25 (649) 467 (734) 64 (1,859) payment arrangements (741) Repurchase of common stock Dividends -common and preferred Cash used by financing activities (1,972)(1,061) Effect of exchange rate changes (1,124) 3,079 788 2,291 Net (decrease) increase in cash and equivalents Cash Cash and equivalents, end of year Supplemental disclosure of cash flow information: Cash paid during the year for of year $1,955 20702.134 Interest, net of capitalized interest Income taxes $ 48 $ 47 S 32 736 Dividends declared and not paid The accompanying notes to consolidated financial statements are an integral part of this statement 58 NIKE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 487 35 94 Excess ot Comprehensive Retained Earni Balance at May 31, 2008 Share! Stock options exercised Conversion to Class B Common Stock Repurchase of Class B Common Stock Dividends on Common stock (S0.98 per share) Issuance of shares to employees Stock-based compensation (Note 11): Forfeiture of shares from employees Arnout Shares Amount Value Income In millions, except per share data) Total. 394 3 2498 251 $ 53$7825 8 (633) (639) (475) (475) 45 ve income; Net income Foreign currency translation and other (net of tax benefit 14871487 of $178) Net gain on cash flow hedges (net of tax expense of $168) Net gain on net investment hedges (net of tax expense (335) (335) of $55) Reclassification to net income of previously deferred net gains 106 related to hedge derivatives (net of tax expense of $40) Total comprehensive income Balance at May 31, 2009 Stock options exercised Conversion to Class B Common Stock Repurchase of Class B Common Stock Dividends on Common stock ($1.06 per share) Issuance of shares to employees Stock-based compensation (Note 11): Forfeiture of shares from employees Comprehensive income: Net income Other comprehensive income (Notes 14 and 17): 390 3$ 2871 $ 368 5451 $ 8693 (747)(754) (515) 40 (515) 1907 1907 Foreign currency translation and other (net of tax benefit of $72) Net gain on cash flow hedges (net of tax expense of $28) Net gain on net investment hedges (net of tax expense of $21) Reclassification to net income of previously deferred net gains (159) 45 related to hedge derivatives (net of tax expense of $42) (122) (122) Reclassification of ineffective hedge gains to net income (net of tax. expense of $1) 3) 1907 1754 215 $ 6,095 $9,754 Total comprehensive income _ 3 3441$ _ Balance at May 31, 2010 90 394 $ 3368 Stock options exercised Repurchase of Class B Common Stock Dividends on Common stock (S1.20 per share) Issuance of shares to employees Stock-based compensation (Note 11) Forfeiture of shares from employees Comprehensive income: Net income Other comprehensive income (Notes 14 and 17): (1,857) (1.871) (569) (569) (24) 105 2,133 2,133 263 (242) (57) Foreign currency translation and other (net of tax expense of $121) Net loss on cash flow hedges (net of tax benefit of $66) Net loss on net investment hedges (net of tax benefit of $28) Reclassification to net income of previously deferred net gains (242) (57) (84 2013 120) 2.133 related to hedge derivatives (net of tax expense of $24) $9 843 Total comprehensive income -78 _ $ 3,044 $ -95-5801 Balance at May 31, 2011 nanying notes to consolidated financial statements are an integral part of this statement The accom Table of Contents TO CONSOLIDATED FINANCIAL STATEMENTS- (Contin NIKE, INC. In October 2009, the FASB issued new sta standards impact the determination of when the individual deliverables included in a multiple-element ar anstion is allocated across thrs are Stoits of accounting. Addi separately identified deliverables by no longer permitting the residual method of allocating arran effective for the Company beginning June 1,2011. The Company does not expect the adoption wit financial position or results of operations. ndards that revised the guidance f tionally, these new standards modify the manner in which the transaction con or revenue recognition with multiple deliverables. These new t may be treated as separate gement consideration. These new standards Note 2 -Inventories Inventory balances of $2,715 million and $2,041 million at May 31,2011 and 2010, respectively e 3 - Property, Plant and Equipment were substantially all finished goods. Not Property, plant and equipment included the following As of May 31 Land Buildings Machinery and equipment Leasehold improvements Construction in process s 237 S 223 952 24872217 821 1,124 931 127 4390 Less accumulated depreciation 2,791 2,458 Capitalized interest was not material for the years ended May 31,2011,2010, and 2009 Note 4- Identifiable Intangible Assets, Goodwill and Umbro Impairment Identified Intangible Assets and Goodwill The following table summarizes the Company's identifiable intangible asset balances as of May 31,2011 31,2010 May 31, 2011 Gross Gross Carrying AccumulatedCarryingCrryingAccumulated Carrying Amortization Amortization(In millions) Amount Amount nt (21) S 48 Amortized intangible assets: $ (24) 56 s 69 40 80 (18) 19 Patents Trademarks Other (25) (22 (71) $ 100 14 32 (57) $ 84 383 47 Total $ 467 Unamortized intangible assets - $ 487 Trademarks Identifiable intangible assets, net 65 C-14 Appendix C Nike, Inc., 2011 Annual Report Table of Contents NIKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) fluctuations for the year ended May 31, 2011 increased unamortized intangible assets by approximately sA million. ve expense, was $16 million, $14 million, and $12 million for the y ears for each of Amortization expense, which is included in selling and administrati ended May 31, 2011, 2010, and 2009, respectively. The estima the years ending May 31, 2012 through May 31,2016 are as follows: 2012 2016: $7 million. ted amortization expense for intangible assets subject to amortization $8 million, $16 million; 2013: $14 million; 2014: 512 million; 2015: summarizes ompany's Other" category for segment reporting purposes. The following table "Other" All goodwill balances are included in the the Company's goodwill balance as of May 31, 2011 and 2010: Goodwill, net Goodwill 393 387 In millions) (199) 194 May 31, 2009 Other (I) May 31, 2010 Umbro France ( 188 10 (199) 10 Other () 205 $ 404 May 31,2011 Other consists of foreign currency translation adjustments on Umbro goodwill In March 2011 , Umbro acquired the remaining 51% of the exclusive licensee and distributor of the Umbro brand in France for approximately $15 million. Umbro Impairment in Fiscal 2009 in the fourth quarter of each fiscal r, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or intangible assets with an indefinite life below its carrying value. As a result of a significant decline in macroeconomic environment, as well as decisions by Company management to adjust planned investment in the Umbro brand, the Company concluded sufficient indicators of impairment existed to require the performance of an interim assessment of Umbro's goodwill and indefinite lived intangible assets as of February 1,2009. Accordingly, the Company performed the first step of the goodwill impairment assessment for Umbro by comparing the estimated fair value of Umbro to its carrying amount, and determined there was a potential impairment of goodwill as the carrying amount exceeded the estimated fair value. Therefore, the Company performed the second step of the assessment which compared the implied fair value of Umbro's goodwill to the book value of goodwill. The implied fair value of goodwill is determined by allocating the estimated fair value of Umbro to all of its assets and liabilities, including both recognized and unrecognized intangibles, in the same manner as goodwill was determined in the original business combination The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives global consumer demand and continued weakness in the The Company measured the fair value of Umbro by using an equal weighting of the fair value implied by a discounted cash flow analysis and by comparisons with the market values of similar publicly traded companies. The Company believes the blended use of both models compensates for the inherent risk associated with either model if used on a stand-alone basis, and this combination is indicative of the factors a market participant would consider when performing a similar valuation. The fair value of Umbro's indefinite-lived trademark was Table of Contents NIKE, INC. estinated using the relifrom royalty method, which asumes that the trademart beConpnted n t O CONSOLIDATED FINANCIAL STATEMENTS- (Continued) rovalties for the benefits received from the trademark, The assessments of the Company of $199 $55 mil determined an equity investment held by Umbro was million and $181 million related to Umbro's goodwill and trademark, respective llion was recognized as a result of the trademark rch assumes that the trademark has value to the extent that Umbro is relieved of the obligation resulted in the recognition of impairment charges e of for the year ended May 31,2009. A tax benefit of vestment. These charges are included in the Company's "Other" category for se impairment charge. In addition to the above impairment analysis, the Company impaired, and recognized a charge of $21 million related to the impairment of this expected cash flow sfor the next 1 2 years and a 3% residual growth rate thereafter. The Company useda eig k in its analysis,. which was derived primarily from published sources as well as our adjustment for incre and projections as the basis for conditions. Other significant estimates used in the discounted cash flow analysis include the rates of proe Umbro's business and working capital effects. The market valuation approach indicates the ation approach incl Umbro to publicly traded companies in similar lines of business. Signi similar companies with comparable business factors such as size. growth, profitability, mix of re distribution, and risk of return on investment nk given current market ased market ri growth and profitability of fair value of Umbro based on a comparison of ificant estimates in the market valuation approach include identifying revenue generated from licensed and direct value of Umbro's net assets by an additional 12%. ons constant at the test date, a 100 basis point increase in the discount rate would reduce the adjusted carrying Note 5- Accrued Liabilities Accrued liabilities included the following: 31 599 S 628 284 Compensation and benefits, excluding taxes Endorser compensation Taxes other than income taxes Fair value of derivatives Dividends payable Advertising and marketing Import and logistics costs Other 267 158 164 131 125 80 214 139 98 $1985 $1,904 Othe r consists of various accrued expenses and no individual item accounted for more than 5% of the balance at May 31, 2011 and 2010 Note 6- Fair Value Measurements securities. Fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale 67 Table of Contents NIKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued) considering such assumptions, the Company uses a three-level hierarchy established by the FASB that prioritizes fair value measurements ba 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 q markets that are prices for similar assets or liabilities in active markets and not active. quoted prices for identical or similar assets or liabilities in . Level 3: Unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety input that is significant to the fair value measurement. based on the most stri ngent level of considehs company'smntohe significeance of a particular input to the fair value measurement in its entirety requires iudement and measured at fair value on a The following table presents information about the Company's financial assets and liabilities of May 31, 2011 and 2010 and indicates the fa value. ir value hierarchy of the valuation techniques utilized by the Company to determine such fair May 31, 2011 Fair Value Measurements Usi Assets /Liabilities at Falr Value Belance Sheet Clssfication Balance Sheet Level I Level 2Leyel 3 (In millions) Derivatives: 38 Other current assets and other Foreign exchange forwards and options $38 long-term assets Interest rate swap 15 Other current assets and other 15 Total derivatives Available-for-sale securities 53 U.S. Treasury securities Commercial paper and bonds Money market funds U.S. Treasury securities 125 157 780 125 Cash equivalents Cash equivalents Short-term investments Short-term investments Short-term 157 780 473 1,473 U.S. Agency securities 308 802 Commercial paper and honds Total Assets 1598 S 2,100 3,698 Liabilities Foreign exchange forwards and options $ 197s 197 rued liabilities and other long-term liabilities Total Liabilities 197 197 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NIKE, INC. (Continued) 010 Assets Derivati vereign exchange Level 1Level 2Level3 at Falr Value In milions) Foreign exchange forwards and Interest rate swap contracts 420 420 15 435 Oxher current assets and other loog -term assets Total derivative 15 Other current assets and other long-term assets Available-for-sale securities U.S. Treasury securities Commercial paper and bonds Money market funds U.S. Treasury securities U.S. Agency securities Commercial paper and bonds 1232 Cash equivalents Cash equivalems 462 685 462 685 Sort-1ermm invesimens Agcial papes 1085 1 085 298 available-for-sale securities Short-term investments 684 Total Asets Liabilities tal Assetse Foreign exchange forwards and 165 Accrued liabilities and $ 165 other long-term liabitities Total Liabilities cial instruments include foreign currency forwards, option contracts and interest rate swaps. derivatives contracts is determined using observable market inputs such as the forward pricing curve, currency and interest material for the years ended May 31,2011 and 2010 and considers nonperformance risk of the Company and that of its counterparties . Adjustments relating to these risks were not rates, of investments in U.S. Treasury and agency securities, commercial paper, bonds and markets (level 2). Level 1 Available-for-sale securities are primarily comprised money market funds. These securities are valued using market prices on both active markets (level 1) and less active instrument valuations are obtained from real-time quotes for transactions in active exchange markets invo instrument valuations are obtained from readily-available pricing sources for comparable instruments lving identical assets. Level 2 d 2010, the Company had no material Level 3 measurements and no assets or liabilities measured at fair value on a non-recurring basis. As of May 31,2011 and 2010, short-term investments consisted of available-for-sale securities. As of May 31,2011, the Company held $2,253 million of available-for-sale securities with maturity dates within one year and $330 million with maturity dates over one year and less than five years within short-term investments. As of May 31,2010, the Company held $1,900 million of available-for-sale securities with maturity dates within one year and $167 million with maturity dates over one year and less than five years within short-term investments Short-Term Investments 69 C-18 Appendix C Nike, Inc., 2011 Annual Report Table of Contents NIKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Short-term investments classified as available-for-sale consist of the following at fair value: Available-for-sale investments: $1,781 $1 383 U.S. treasury and agencies Commercial paper and bonds $2.583 2067 Total available-for-sale investments Included in interest expense (income), net for the years ended May 31,2011,2010, and 2009 was interest income of $30 mill For fair value information regarding notes payable and long-term debt, refer to Note 7- Short-Term Borrowings and Credit Lines and million, $30 million, and S50 million, respectively, related to cash and equivalents and short-term investments. Note 8- Long-Term Debt. Note 7- Short-Term Borrowings and Credit Lines 2010, are summarized below: Notes payable to banks and interest-bearing accounts payable to Sojitz Corporation of America ("Sojitz America") as of May 31,2011 and May 31 Interest Interest Borrowings Rate In millions) Notes payable: U.S. operations Non-U.S. operations 35 152 S 187 121 S 139 S 88 7.05% (I) 6.35% (l) 0.99% Sojitz America Weighted average interest rate includes non-interest bearing overdrafts. The carrying amounts reflected in the consolidated balance sheet for notes payable approximate fair value The Company purchases through Sojitz America certain athletic footwear, apparel and equipment it acquires from non-U.S. suppliers 07% Cl) These purchases are for the Company's operations outside of generally due up to 60 days after shipment foreign port. The Interbank Offered Rate ( LIBOR ) as of the beginning of the month of the invoice date, plus 0.75% the United States, Europe and Japan. Accounts payable to Sojitz America are of goods from the foreign port. The interest rate on such accounts payable is the 60-day London As of May 31,2011 and 2010, the Company had no amounts outstanding under its commercial paper program. In December 2006, the Company entered into a $1 billion revolving credit facility with a group of banks. The facility matures in December 2012. Based on the Company's current long-term senior unsecured debt ratings of A+ and Al from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NIKE, INC. ate charged on any outstanding borrowings would be the I Inder this agreement, the Company must maintain, among other things, certain minimum specifed vas in compliance at May 31,201 i. No amounts were outstanding under this facility as of May Continned) prevailing LIBOR plus 0.15%. The facility fee is 0.05% of the total commitment financial ratios with which the Company ,2011I and 2010. Note 8- Long-Term Debt Long-term debt, net of unamortized premiums and discounts and swap fair value adjustments , is comprised of the following: 566% Corporate bond, payable July 23, 2012 540% Corporate bond, payable August 7 . 201 2 4.70% Corporate bond, payable October 2013 5.1 5% Corporate bond, payable October 15, 2015 4.30% Japanese Yen note, payable June 26, 2011 1.52% Japanese Yen note, payable February 14, 2012 2.60% Japanese Yen note, maturing August 20, 2001 through November 20, 2020 2.00% Japanese Yen note, maturing August 20, 2001 through November 20, 2020 011 In millions) 26 16 50 114 130 50 112 116 62 53 24 453 54 Total 476 200 $276 Less current maturities $446 $58 million, $8 million and $109 million, at face value, respectively g-term debt in each of the years ending May 31,2012 through 2016 are $200 million, $48 million, The Company's adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments long-term debt, including the current portion, was approximately $482 million at May 31,2011 and $453 million at May 31,2010. s long-term debt is recorded at adjusted cost, net of amortized premiums and discounts and interest rate swap fair . The fair value of the Company's outstanding at May 31, 2011 The outstanding notes have coupon rates that range from July 2012 to October 2015. For each of these notes, except the $50 million note maturing in October 2013, the Company rate swap agreements whereby the Company receives fixed interest payments at the same rate as the notes and pays v based on the six-month LIBOR plus a spread. Each swap has the same notional amount and maturity date as the corresponding 2011 , the interest rates payable on these swap agreements ranged from approximately 0.3% to 1 0% In fiscal years 2003 and 2004, the Company issued a total of $240 million in medium-term notes of which $190 million, at face value, were has entered into interest note. At May 31, 4.70% to 5.66% and maturity dates ranging from ariable interest payments In June 1996, one of the Company's wholly owned Japanese subsidiaries, NIKE Logistics YK, borrowed Y10.5 billion (approximately $130 million as of May 31,201I) in a private placeme provides for early retirement of the borrowing nt with a maturity of June 26, 2011. Interest is paid semi-annually. The agreement In July 1999, NIKE Logistics YK assumed a total of Y130 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020. Interest is also paid quarterly. As of May 31,2011, Y6.3 billion (approximately $78 million) in loans remain outstanding. 71 Table of Contents NIKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) o rtain intercompany borrowings and matures on February 14, 2012. The interest rate on the loan is approximately 1 5% and interest is paid semi-annually In February 2007, NIKE Logistics YK entered into a 5.0 billion (approximately $62 million as of May 31, 2011) term loan that replaced Note 9- Income Taxes Income before income taxes is as follows: 1a 31200 In millions) $1,084699 846 1.760 1,818 1.111 Income before income taxes: United States Foreign $2,844 $2,517 $1,957 The provision for income taxes is as follows: Year Ended May 31 2010 2011 2009 (In millions) $ 410 46 308 764 United States $289$200 50 349 599 Federal State 57 441 787 Foreign United States Federal State 35 (15 (76) $711 11(294) S 470 $610 A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate follows Year Ended May 31 2010 2011 2009 Federal income tax rate State taxes, net of federal benefit Foreign earnings Other, net Effective income tax ra 35.0% 1.3% -10.2% 1.1% 25.0% 35.0% 1.3% 13.6% 1.5% 242% 35,0% 1.2% 14.9% 2.7% - 240% The effective tax rate for the year ended May 31, 2011 of 25.0% increased from the fiscal 2010 effective tax rate of 24.2% due the change in geographic mix of earnings. A larger percentage of our earnings before income taxes in the current year are attributable to primarily to operarions in th Uunited States where the statutory tax rate is generlly higher than the tax teons ouside of the U.S. This impaet vas partially offset by 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NIKE, INC. hanges to uncertain tax positions. Our effective tax rate for the year ended May 31. 2010r of 240% The effective tax rate for fiscal 2009 related to charges intangible and other assets - (Continued) year ended May 31, 2010 of 24.2% increased from the fiscal 2009 effective rate aciudes a tax benefit related to charges recorded for the impairment of Umbro's goodwill. Deferred tax assets and (liabilities) are comprised of the following Deferred tax assets: (In millioms) Allowance for doubtful accounts Inventories Sales return reserves Deferred compensation Stock-based compensation Reserves and accrued liabilities Foreign loss carry-forwards 19 63 $ 17 47 144 145 86 26 152 148 ign tax credit carry-forwards 60 Hedges Undistributed earnings of foreign subsidiaries Other 128 86 923 (51 872 Total deferred tax assets 831 (36 795 Valuation allowance Total deferred tax assets after valuation allowance Deferred tax liabilitie Undistributed carnings of foreign subsidiaries Property, plant and equipment Intangibles Hedges Other (40) (151) (99) (99) (72) (97) (20) (309) $ 563 278) $ 517 Total deferred tax liability Net deferred tax asset The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits: May 31 2011 $274 Unrecognized tax benefits, as of the beginning of the period Gross increases related to prior period tax positions Gross decreases related to prior period tax positions Gross increases related to current period tax positions Gross decreases related to current period tax positions Settlements Lapse of statute of limitations Changes due to currency translation Unrecognized tax benefits, as of the end of the period 53 13 (98) 59 (122) 52 (62) 72 (43) (29) $212 $ 282 $274 73 Table of Contents NIKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) million, $93 million of s, excluding interest As of May 31, 2011, the total gross unrecognized tax benefits, excluding related interest and penalties, were $212 which would affect the Company's effective tax rate if recognized in future periods. Total gross unrecognized tax tbo and penalties, as of May 31, 2010 and 2009 was $282 million and $274 million, respectively payment of The Company recognizes interest and penalties related to income tax matters in income tax expense. The liability for and penalties increased $10 million, $6 million, and $2 million during the years ended May 31,2011, 2010, and 2009 May 31,2011 and 2010, accrued interest and penalties related to uncertain tax positions was $91 million and $81 million (excluding federal benefit) , respectively The Company has concluded substantially all U.S. federal income tax matters through fiscal year 2009. The Company is current the Internal Revenue Service for the The Company is subject to taxation primarily in the U.S., China and the Netherlands as well as various state and other foreigrn foreign jurisdictions under audit by 2010 tax year. The Company's major foreign jurisdictions, China and the Netherlands, have substantially all income tax matters through calendar 2000 and fiscal 2005 , respectively. The Company estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $69 million within the next 12 months as a result of resolutions of gl tax examinations and the expiration of applicable statutes of limitations The Company has indefinitely reinvested approximately $4.4 billion of the cumulative undistributed earnings of certain foreign the amount of unrecognized deferred tax subsidiaries. Such earnings would be subject to U.S. liability associated with the indefinitely reinvested taxation if repatriated to the U.S. Determination of t cumulative undistributed earnings is not practicable. A portion of the Company's foreign operations are benefitting from a tax holiday that will phase out in 2019. The decrease in income tax expense for the year ended May 31,2011 as a result of this arrangement was approxi million ($0.06 per diluted share) for the year ended May 31,2010 $36 million (50.07 per diluted share) and $30 Deferred tax assets at May 31, 2011 and 2010 were reduced by a valuatio n allowance relating to tax benefits of certain subsidiaries with will not be realized. The net change in the valuation allowance was an increase of $15 million and S10 million for the years ended May 31,2011 and 2010, respectively and a decrease of $15 million for the year operating losses where it is more likely than not that the deferred tax assets ended May 31, 2009 The Company does not anticipate that any foreign tax credit carry-forwards will expire. The Company has available domestic and foreign Year Ending May 31 2017 2013 2014 2015 2016 2028Indeflnite 0LdefialtLotal 61 $183 Net Operating Losses $7 $1 $4 $10 $91 During the years ended May 31,2011,2010, and 2009, income tax benefits attributable to employee stock-based compensation transactions of $68 million, $57 million, and $25 million, respectively, were allocated to shareholders' equity 74 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NIKE, INC. Note 10 - Redeemable Preferred Stock ATEMENTS-(Continued) Sojitz America is the sole owner of the Company's authorized Redeemable of Sojitz America or the Company at par value Preferred Stock, S1 par value, which is redeemable at the aggregating $0.3 million. A cumulative dividend of $0.10 per share is payable annually on May en declared and paid in full. There have been no changes in the Redeemable Pr not have general voting nmerger, consolidationstates. 2009. As the holder of the Redeemable Preferred Stock, Sojitz America common stock of the Company unless dividends on the Redeemable Preferred Stock Preferred Stock in the three years ended May 31,2011 class on the sale of all or substantially all of the assets of the ubbte Preferrd Stock, Sojitz America does not have general voting rights but does have the right to vote as a or dissolution of the Company or on the sale or assignment of Company and its s on mer the NIKE trademark for athletic footwear sold in the United States. Note 11 - Common Stock and Stock-Based Compensation The authorized number of shares of Class A Common Stock, no par value, and Class B Common 750 million, respectively. Each share of Class A Common Stock is convertible into one share B Common Stock, no par value, are 175 million and Stock are limited in certain circumstances with respect to the election of directors. of Class B Common Stock. Voting rights of Class In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc 1990 Plan provides for the issuance of up to 163 million and other awards gran apprec 1990 Stock Incentive Plan (the "1990 Plan"). The previously unissued shares of Class B Common Stock in connection with stock options ted under the plan. The 1990 Plan authorizes the grant of non-statutory stock options, incentive stock options, stock ds. The exercise price for stock options and stock iation rights, restricted stock, restricted stock units, and performance-based awar rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of authority to determine the employees to whom awards will be made, the amount of grants outstanding under the 1990 Plan were granted administers the 1990 Plan. The committee has the Directors awards, and the other terms and conditions of the awards. Substantially all stock option uarter of each fiscal year, vest ratably over four years, and expire 10 years t The following table summarizes the Company's total stock-based compensation expense recognized in selling and administrative expense Year Ended 2011 2010 309 in millions) s 77 $135 $129 Stock options () ESPPs Restricted stock 14 14 108 159 20 Subtotal Stock options and restricted stock expense-restructuring Total stock-based compensation expense $159 $171 $105 )Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for accelerated vesting provisions of its stock option plan. Under the new provisions, accelerated stock option expense for year ended May 31, 2011 was $12 million. The accelerated stock option expense for the years ended May 31,2010 and 2009 was $74 million and $59 million, respectively employees eligible for accelerated stock option vesting upon retirement. In the first quarter of fiscal 2011, the Company changed the 75 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NIKE, INC. Continued) The weighted average contractual life remaining for options outstanding and options exe years, respectively. The respectively. The aggregate intrinsic value value for options outstanding and exercisable at May 31,2011 was $1.154 aggregate intrinsic cisable at May 31, 2011 was 6.0 years and 4.5 ons. The total intrinsic value of the options exercised during the years ended May 31,2011,20 and $108 million, respectively exereisable at May 31,2011 was $1,154 million and $811 million, market value of the underlying stock exceeded the exercise price of the and 2009 was $267 million, S239 million was the amount by which the In addition to the 1990 Plan, the Company gives tock purchase plans ("ESPPs"). Employees are eligible to each six-month Ottenngperiod, shares are purchased by the parti employees the right to purchase shares at a discount to the market price under employee to purchase participate through payroll deductions up to 10% of their compensation. At the end of cipants a185% of the lower of the fair market value at the beginning or the end illion shares during the years ended May 31.2011 and 2010, and 1.0 million shares during the year ended May 31, 2009 From time to time, the Company grants restricted stock May 31, 2011,2010, and 2009 were 0.2 million, 0.5 million, and 0.1 million with weighted res pectively. Recipients of restricted shares are entitled to cash dividends and to vote and unrestricted stock to key employees under the 1990 Plan. The number of values per share of $70.23, S53.16, and $56.97, their respective of grant. During the years ended May 31,2011,2010, and 2009, the fair value of restricted shares vested was million, respectively, determined as of the date of vesting shares throughout the period of restriction. Th e value of all of the granted shares was established by the market price on the date $15 million, $8 million, and $10 Note 12 - Earnings Per Share The following is a reconciliation from basic earnings per share to diluted earnigs 2009, respectively. but were not inc 0.2 million, and 13.2 million shares of common stock were outstanding at May 31,2011, 2010, and 200S the computation of diluted earnings per share because the options were anti-dilutive. per share. Options to purchase an additional 0.2 million, 2009,respectively. but were not i 31 2009 2011 n millions, except per share data) 485.5 493.9 S 3.93 Determination of shares 484.9 Weighted average common shares outstanding Assumed conversion of dilutive stock options and aw 10.2 490.7 Diluted weighted average common shares outstanding Basic earnings per common share Diluted earnings per common share $ 3.03 $ 4.39 Benefit Plans The Company has a profit sharing plan available to most U.S.-based employees. The terms of the plan call for annual contributions by the Company as determined by the Board of Directors. A subsidiary of the Company also has a profit sharing plan available to its U.S-based employees. The terms of the plan call for annual contributions as determined by the subsidiary's executive management. Contributions of $39 million, $35 million, and $28 million were made to the plans and are included in selling and administrative expense for the years ended May 31, 2011,2010, and 2009, respectively. The Company has various 401(k) employee savings Note 13 NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NIKE, INC North America Western Europe Central & Eastern Europe Greater China Japan Emerging Markets Global Brand Divisions Year Ended $ 6,696 3,892 S 7578 $ 6,778 3810 1031 2060 1,742 882 2,199 4,139 1 247 1,743 926 1 828 Total NIKE Brand 2,736 Other Businesses Corporate 123 18,104 2,747 105 16,509 2530 16.757 2,419 Total NIKE Consolidated Revenues Earnings Before Interest and Taxes $20.362 $19.014$19.176 North America Western Europe Central & Eastern Europe Greater China apan Emerging Markets Global Brand Divisions 1,750 1538 1429 856 253 637 515 521 (998 3,285 334 Total NIKE Brand Other Businesses () 3,118 3095 299 894) 2,523 (193) (955) 1,947 Total NIKE Consolidated Earnings Before Interest and Taxes 2,848 Interest expense (income), net Total NIKE Consolidated Earnings Before Taxes Additions to Long-lived Assets $ 1957 $ 2,844 North America Western Europe Central & Eastern Europe Greater China Japan Emerging Markets Global Brand Divisions 80 10 12 21 30 Total NIKE Brand Other Businesses Corporate 72 $ 456 $ 432 $ 335 Total Additions to Long-lived Assets Depreciation $ 70 65 64 52 North America Western Europe Central & Eastern Europe Greater China Japan Emerging Markets Global Brand Divisions 30 10 12 46 Total NIKE Brand Other Businesses Corporate $ 324 $ 335 $ 335 Total Depreciation 85