Nike 2006 Annual Report Download - page 40

We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be
reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this
approach, because the determination involves our future plans and expectations of future events, the possibility
exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the
actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign
entities may be less than our current expectations. This would result in additional income tax expense in the year
we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also
result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided)
will be indefinitely reinvested offshore. In this case, our income tax expense would be reduced in the year of such
determination.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. The estimated
annual effective tax rate is then applied to the year-to-date pre-tax income excluding significant or infrequently
occurring items, to determine the year-to-date tax expense. The income tax effects of infrequent or unusual items
are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our
estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process
periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust
the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date
provision equals the expected annual rate.
Other Contingencies
In the ordinary course of business, we are involved in legal proceedings regarding contractual and
employment relationships, product liability claims, trademark rights, and a variety of other matters. We record
contingent liabilities resulting from claims against us, including related legal costs, when it is probable that a
liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities
when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability.
Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the
potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently
uncertain. Currently, we do not believe that any of our pending legal proceedings or claims will have a material
impact on our financial position or results of operations. However, if actual or estimated probable future losses
exceed our recorded liability for such claims, we would record additional charges as other expense, net during the
period in which the actual loss or change in estimate occurred.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business and consistent with established policies and procedures, we employ a
variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest
rates. It is our policy to utilize these financial instruments only where necessary to finance our business and
manage such exposures; we do not enter into these transactions for speculative purposes.
We are exposed to foreign currency fluctuation as a result of our international sales, product sourcing and
funding activities. Our foreign currency risk management objective is to reduce the variability of local entity cash
flows as a result of exchange rate movements. We use forward exchange contracts and options to hedge certain
anticipated but not yet firmly committed transactions as well as certain firm commitments and the related
receivables and payables, including third party and intercompany transactions.
When we begin hedging exposures depends on the nature of the exposure and market conditions. Generally,
all anticipated and firmly committed transactions that are hedged are to be recognized within twelve months,
although at May 31, 2006 we had forward contracts hedging anticipated transactions that will be recognized in as
many as 18 months. The majority of the contracts expiring in more than twelve months relate to the anticipated
purchase of inventory by our European and Japanese subsidiaries. We use forward contracts to hedge
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