Nike 2006 Annual Report Download - page 61

NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate follows:
Year Ended May 31,
2006 2005 2004
Federal income tax rate ............................................ 35.0% 35.0% 35.0%
State taxes, net of federal benefit ..................................... 1.5 1.8 2.1
Foreign earnings .................................................. (1.5) (2.8) (0.6)
Other, net ....................................................... — 0.9 (1.7)
Effective income tax rate ........................................... 35.0% 34.9% 34.8%
During the quarter ending November 30, 2005, the Company’s CEO and Board of Directors approved a
domestic reinvestment plan as required by the American Jobs Creation Act of 2004 (the “Act”) to repatriate $500
million of foreign earnings in fiscal 2006. The Act creates a temporary incentive for U.S. multinational
corporations to repatriate accumulated income earned outside the U.S. by providing an 85% dividend received
deduction for certain dividends from controlled foreign corporations. A $500 million repatriation was made
during the quarter ending May 31, 2006 comprised of both foreign earnings for which U.S. taxes has previously
been provided and foreign earnings that had been designated as permanently reinvested. Accordingly, the
provisions made did not have a material impact on the Company’s income tax expense or effective tax rate for
the years ended May 31, 2006 and 2005.
The Company has indefinitely reinvested approximately $850.0 million of the cumulative undistributed
earnings of certain foreign subsidiaries. Such earnings would be subject to U.S. taxation if repatriated to the U.S.
The amount of unrecognized deferred tax liability associated with the permanently reinvested cumulative
undistributed earnings was approximately $154.6 million.
Deferred tax assets at May 31, 2006 and 2005 were reduced by a valuation allowance relating to tax benefits
of certain foreign subsidiaries with operating losses where it is more likely than not that the deferred tax assets
will not be realized.
A deferred tax asset has been recorded for foreign tax credit carryforwards of $9.5 million at May 31, 2006
which expire by the year ended May 31, 2016.
During the years ended May 31, 2006, 2005, and 2004, income tax benefits attributable to employee stock
option transactions of $54.2 million, $63.1 million, and $47.2 million, respectively, were allocated to
shareholders’ equity.
Note 9 — Redeemable Preferred Stock
Sojitz America is the sole owner of the Company’s authorized Redeemable Preferred Stock, $1 par value,
which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million. A
cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid
on the common stock of the Company unless dividends on the Redeemable Preferred Stock have been declared
and paid in full. There have been no changes in the Redeemable Preferred Stock in the three years ended May 31,
2006, 2005 and 2004. As the holder of the Redeemable Preferred Stock, Sojitz America does not have general
voting rights but does have the right to vote as a separate class on the sale of all or substantially all of the assets
of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company or on
the sale or assignment of the NIKE trademark for athletic footwear sold in the United States.
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