Nike 2014 Annual Report Download - page 13

PART I
the final determination of tax audits and any related disputes could be
materially different from our historical income tax provisions and accruals. The
results of audits or related disputes could have an adverse effect on our
financial statements for the period or periods for which the applicable final
determinations are made.
If one or more of our counterparty financial institutions
default on their obligations to us or fail, we may incur
significant losses.
As part of our hedging activities, we enter into transactions involving derivative
financial instruments, which may include forward contracts, commodity
futures contracts, option contracts, collars, and swaps with various financial
institutions. In addition, we have significant amounts of cash, cash
equivalents, and other investments on deposit or in accounts with banks or
other financial institutions in the United States and abroad. As a result, we are
exposed to the risk of default by or failure of counterparty financial institutions.
The risk of counterparty default or failure may be heightened during economic
downturns and periods of uncertainty in the financial markets. If one of our
counterparties were to become insolvent or file for bankruptcy, our ability to
recover losses incurred as a result of default or our assets that are deposited
or held in accounts with such counterparty may be limited by the
counterparty’s liquidity or the applicable laws governing the insolvency or
bankruptcy proceedings. In the event of default or failure of one or more of our
counterparties, we could incur significant losses, which could negatively
impact our results of operations and financial condition.
We rely on a concentrated source base of contract
manufacturers to supply a significant portion of our
footwear products.
NIKE is supplied by approximately 150 footwear factories located in 14
countries. We do not own or operate any of our own manufacturing facilities
and depend upon independent contract manufacturers to manufacture all of
the products we sell. In fiscal 2014, five footwear contract manufacturers
each accounted for greater than 10% of fiscal 2014 footwear production, and
in aggregate accounted for approximately 67% of NIKE Brand footwear
production in fiscal 2014. Our ability to meet our customers’ needs depends
on our ability to maintain a steady supply of products from our independent
contract manufacturers. If one or more of our significant suppliers were to
sever their relationship with us or significantly alter the terms of our
relationship, we may not be able to obtain replacement products in a timely
manner, which could have a material adverse effect on our sales, financial
condition, or results of operations. Additionally, if any of our primary contract
manufacturers fail to make timely shipments, do not meet our quality
standards, or otherwise fail to deliver us product in accordance with our plans,
there could be a material adverse effect on our results of operations.
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, specialized performance fabrics designed to efficiently
wick moisture away from the body, retain heat, or repel rain and/or snow as
well as plastic and metal hardware — 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. Both our apparel and footwear
products are dependent upon the ability of our unaffiliated contract
manufacturers to locate, train, and employ adequate personnel. NIKE
contractors and suppliers buy raw materials in bulk and are subject to wage
rates that are oftentimes regulated by the governments of the countries in
which our products are manufactured.
There could be a significant disruption in the supply of fabrics or raw materials
from current sources or, in the event of a disruption, our contract
manufacturers might not be able to locate alternative suppliers of materials of
comparable quality at an acceptable price, or at all. Further, our unaffiliated
contract manufacturers have experienced and may continue to experience in
the future, unexpected increases in work wages, whether government
mandated or otherwise. 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 increases in demand, or reductions in the availability of
materials, 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 suppliers and manufacturers in our methods,
products, quality control standards, and labor, health, and safety standards.
Any delays, interruption, or increased costs in labor or wages, or 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, infrastructure congestion, or other factors, and costs
and delays associated with consolidating or transitioning between
manufacturers, 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 air freight,
which could adversely affect our profit margins. The cost of oil is a significant
component in manufacturing and 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 the Company. During fiscal 2014, Sojitz America provided financing and
purchasing services for NIKE Brand products sold in certain NIKE markets
including Argentina, Uruguay, Canada, Brazil, India, Indonesia, the Philippines,
Malaysia, South Africa, and Thailand (collectively the “Sojitz Markets”),
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 in the Sojitz Markets. Such a disruption could result
in canceled orders that would adversely affect sales and profitability.
Our success depends on our global distribution facilities.
We distribute our products to customers directly from the factory and through
distribution centers located throughout the world. Our ability to meet
customer expectations, manage inventory, complete sales, and achieve
objectives for operating efficiencies and growth, particularly in emerging
markets, depends on the proper operation of our distribution facilities, the
development or expansion of additional distribution capabilities, and the
timely performance of services by third parties (including those involved in
shipping product to and from our distribution facilities). Our distribution
facilities could be interrupted by information technology problems and
disasters such as earthquakes or fires. Any significant failure in our distribution
facilities could result in an adverse effect on our business. We maintain
business interruption insurance, but it may not adequately protect us from
adverse effects that could be caused by significant disruptions in our
distribution facilities.
We rely significantly on information technology to operate
our business, including our supply chain and retail
operations, and any failure, inadequacy, or interruption of
that technology could harm our ability to effectively
operate our business.
We are heavily dependent on information technology systems and networks,
including the Internet and third-party hosted services (“information technology
systems”), across our supply chain, including product design, production,
forecasting, ordering, manufacturing, transportation, sales, and distribution,
as well as for processing financial information for external and internal
reporting purposes, retail operations, and other business activities. Our ability
to effectively manage and maintain our inventory and to ship products to
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