Nike 2006 Annual Report Download - page 16

recorded in foreign currencies and translated into U.S. dollars for consolidated financial reporting. Currency
exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our
products by making their purchases of raw materials more expensive and more difficult to finance. Foreign
currency fluctuations could have an adverse effect on our results of operations and financial condition.
We engage in hedging activities to mitigate the impact of the translation of foreign currencies on our
financial results. See Note 16 to our financial statements, Risk Management and Derivatives. Our hedging
activities are designed to reduce and delay, but not to eliminate, the effects of foreign currency fluctuations.
Factors that could affect the effectiveness of our hedging activities include accuracy of sales forecasts, volatility
of currency markets, and the availability of hedging instruments. Since the hedging activities are designed to
reduce volatility, they not only reduce the negative impact of a stronger U.S. dollar, but they also reduce the
positive impact of a weaker U.S. dollar. Our future financial results could be significantly affected by the value
of the U.S. dollar in relation to the foreign currencies in which we conduct business. The degree to which our
financial results are affected for any given time period will depend in part upon our hedging activities.
Our products are subject to risks associated with overseas sourcing, manufacturing, and financing.
The principal materials used in our apparel products — natural and synthetic fabrics and threads, plastic and
metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport
body moisture — are available in countries where our manufacturing takes place. The principal materials used in
our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon,
leather, canvas and polyurethane films — are also locally available to manufacturers. NIKE contractors and
suppliers buy raw materials in bulk.
There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in
the event of a disruption, we might not be able to locate alternative suppliers of materials of comparable quality
at an acceptable price, or at all. In addition, we cannot be certain that our unaffiliated manufacturers will be able
to fill our orders in a timely manner. If we experience significant increased demand, or need to replace an
existing manufacturer, there can be no assurance that additional supplies of fabrics or raw materials or additional
manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any
supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition,
even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter
delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in
our methods, products, quality control standards, and labor, health and safety standards. Any delays, interruption
or increased costs in the supply of materials or manufacture of our products could have an adverse effect on our
ability to meet retail customer and consumer demand for our products and result in lower revenues and net
income both in the short and long term.
Because independent manufacturers manufacture a majority of our products outside of our principal sales
markets, our products must be transported by third parties over large geographic distances. Delays in the
shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, or
other factors could adversely impact our financial performance. In addition, manufacturing delays or unexpected
demand for our products may require us to use faster, but more expensive, transportation methods such as
aircraft, which could adversely affect our profit margins. The cost of fuel is a significant component in
transportation costs, so increases in the price of petroleum products can adversely affect our profit margins.
In addition, Sojitz America performs significant import-export financing services for nearly all of the NIKE
brand products sold outside of the United States, Europe, Middle East, Africa and Japan, excluding products
produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of
Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to
our customers outside of the United States, Europe, Middle East, Africa, and Japan. Such a disruption could
result in cancelled orders that would adversely affect sales and profitability.
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