Nike 2011 Annual Report Download - page 26

26 NIKE,INC.-Form10-K
PARTII
ITEM7Management’s Discussion and Analysis of Financial Condition and Results of Operations
Corporate revenues primarily consist of (1)foreign currency hedge gains
and losses related to revenues generated by entities within the NIKE Brand
geographic operating segments but managed through our central foreign
exchange risk management program and (2)foreign currency gains and
losses resulting from the difference between actual foreign currency rates
and standard rates assigned to these entities, which are used to record any
non-functional currency revenues into the entity’s functional currency.
In addition to the foreign currency gains and losses recognized in Corporate
revenues, foreign currency results include all other foreign currency hedge results
generated through our centrally managed foreign exchange risk management
program, other conversion gains and losses arising from re-measurement of
monetary assets and liabilities in non-functional currencies, and gains and
losses resulting from the difference between actual foreign currency rates and
standard rates assigned to each entity in NIKE Brand geographic operating
segments, which are used to record any non-functional currency product
purchases into the entity’s functional currency. Prior to fi scal2010, all foreign
currency results, including hedge results and other conversion gains and losses,
generated by the Western Europe and Central& Eastern Europe geographies
were recorded in their respective geographic results.
Fiscal 2011 Compared to Fiscal 2010
For fi scal2011, the decrease in Corporate expense was primarily driven
byyear-over-year net foreign currency gains generated by our centrally
managed foreign exchange risk management program. Also contributing to
the decrease in Corporate expense for fi scal2011 was a $54millionyear-
over-year reduction in stock options expense primarily due to a change in
accelerated vesting provisions that took effect in the fi rst quarter of fi scal2011
and a lower estimated fair value for stock options granted in the currentyear.
These benefi ts more than offset an increase in corporate operating overhead
expenses, primarily driven by higher wage-related expense.
Fiscal 2010 Compared to Fiscal 2009
In fi scal2009, results for Corporate included a pre-tax restructuring charge
of $195million. Excluding this restructuring charge, loss before interest and
taxes for Corporate would have increased by 18% for fi scal2010, primarily
driven by an increase in performance-based compensation.
Foreign Currency Exposures and Hedging Practices
Overview
As a global company with signifi cant operations outside the U.S., in the
normal course of business we are exposed to risk arising from changes in
currency exchange rates. Foreign currency fl uctuations affect the recording
of transactions, such as sales, purchases and intercompany transactions
denominated in non-functional currencies, and the translation into U.S. dollars
of foreign currency denominated results of operations, fi nancial position and
cash fl ows. Our foreign currency exposures are due primarily to U.S. dollar
transactions at wholly-owned foreign subsidiaries, as well as transactions
and translation of results denominated in Euros, British Pounds, Chinese
Renminbi and Japanese Yen.
Our foreign exchange risk management program is intended to minimize both
the positive and negative effects of currency fl uctuations on our reported
consolidated results of operations, fi nancial position and cash fl ows. This also
has the effect of delaying the majority of the impact of current market rates on
our consolidated fi nancial statements, the length of the delay is dependent
upon hedge horizons. We manage global foreign exchange risk centrally on
a portfolio basis, to address those risks that are material to NIKE,Inc. on a
consolidated basis. We manage these exposures by taking advantage of
natural offsets and currency correlations that exist within the portfolio and where
practical, by hedging a portion of certain remaining material exposures, using
derivative instruments such as forward contracts and options. Our hedging
policy is designed to partially or entirely offset changes in the underlying
exposures being hedged. We do not hold or issue derivative instruments for
trading purposes.
Transactional exposures
We transact business in various currencies and have signifi cant revenues
and costs denominated in currencies other than the functional currency of
the relevant subsidiary, both of which subject us to foreign currency risk. Our
most signifi cant transactional foreign currency exposures are:
1. Inventory Purchases— Most of our inventory purchases around the
world are denominated in U.S. dollars. This generates foreign currency
exposures for all subsidiaries with a functional currency other than
the U.S. dollar. A weaker U.S.dollar reduces the inventory cost in the
purchasing subsidiary’s functional currency whereas a stronger U.S.dollar
increases the inventory cost.
2. Non-Functional Currency Revenues— A portion of our Western Europe
geography revenues are earned in currencies other than the Euro (e.g.
British Pound), but are recognized at a subsidiary that uses the Euro
as its functional currency, generating foreign currency exposure.
3. Other Revenues and Costs— Non-functional currency revenues and
costs, such as endorsement contracts, intercompany royalties and
other payments, generate foreign currency risk to a lesser extent.
4. Non-Functional Currency Monetary Assets and Liabilities— Our global
subsidiaries have various assets and liabilities, primarily receivables and
payables denominated in currencies other than their functional currency.
These balance sheet items are subject to re-measurement, which may
create fl uctuations in other (income), 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. As of May31,2011, we use currency
forward contracts and options with maturities up to 15months to hedge
the effect of exchange rate fl uctuations on probable forecasted future cash
fl ows, including non-functional currency revenues and expenses. These
are accounted for as cash fl ow hedges in accordance with the accounting
standards for derivatives and hedging. The fair value of these instruments
at May31,2011 and 2010 was $28million and $206million in assets and
$136million and $25million in liabilities, respectively. The effective portion of the
changes in fair value of these instruments is reported in other comprehensive
income (“OCI”), a component of shareholders’ equity, and reclassifi ed into
earnings in the same fi nancial statement line item and in the same period or
periods during which the related hedged transactions affect earnings. The
ineffective portion is immediately recognized in earnings as a component
of other (income), net. Ineffectiveness was not material for theyears ended
May31,2011,2010, and 2009.
Certain currency forward contracts used to manage foreign exchange exposure
of non-functional currency monetary assets and liabilities subject to re-
measurement are not designated as hedges under the accounting standards for
derivatives and hedging. In these cases, the change in value of the instruments
is immediately recognized in other (income), net and is intended to offset the
foreign currency impact of the re-measurement of the related non-functional
currency asset or liability being hedged. The fair value of these instruments
at May31,2011 and 2010 was $9million and $104million in assets and
$17million and $140million in liabilities, respectively.
Refer to Note17— Risk Management and Derivatives in the accompanying
Notes to the Consolidated Financial Statements for additional quantitative detail.