Nike 2014 Annual Report Download - page 26

PART II
Other Expense (Income), Net
(In millions) Fiscal 2014 Fiscal 2013 Fiscal 2012
Other expense (income), net $ 103 $ (15) $ 54
Other expense (income), net comprises foreign currency conversion gains
and losses from the re-measurement of monetary assets and liabilities
denominated in non-functional currencies and the impact of certain foreign
currency derivative instruments, as well as unusual or non-operating
transactions that are outside the normal course of business.
Fiscal 2014 Compared to Fiscal 2013
Other expense (income), net shifted from $15 million of other (income), net for
fiscal 2013 to $103 million of other expense, net, for fiscal 2014, primarily
driven by a $90 million adverse change in foreign currency conversion gains
and losses as well as an adverse legal judgment in the second quarter of the
current year related to a long outstanding bankruptcy case for a former
customer in Western Europe.
We estimate the combination of the translation of foreign currency-
denominated profits from our international businesses and the year-over-year
change in foreign currency related gains and losses included in Other
expense (income), net had an unfavorable impact on our Income before
income taxes of $139 million for fiscal 2014.
Fiscal 2013 Compared to Fiscal 2012
Other expense (income), net shifted from $54 million of other expense, net for
fiscal 2012 to $15 million of other (income) net, for fiscal 2013. This change
was primarily driven by a $48 million decrease in foreign currency net losses
as well as the recognition of a $24 million restructuring charge for NIKE
Brand’s Western Europe operations in fiscal 2012. These positive impacts
were partially offset by smaller net gains from non-operating items.
We estimate the combination of the translation of foreign currency-
denominated profits from our international businesses and the year-over-year
change in foreign currency related gains and losses included in Other
expense (income), net had an unfavorable impact on our Income before
income taxes of $56 million for fiscal 2013.
Income Taxes
Fiscal 2014 Fiscal 2013 % Change Fiscal 2012 % Change
Effective tax rate 24.0% 24.7% (70) bps 25.0% (30) bps
Fiscal 2014 Compared to Fiscal 2013
The 70 basis point decrease in our effective tax rate for the fiscal year was
primarily driven by an increase in earnings in lower tax jurisdictions. During the
fourth quarter of the fiscal year ended May 31, 2014, we reached a resolution
with the IRS on an Advanced Pricing Agreement. This agreement did not
have a material impact on our effective tax rate for fiscal 2014. Refer to
Note 9 — Income Taxes in the accompanying Notes to the Consolidated
Financial Statements for additional disclosure.
Fiscal 2013 Compared to Fiscal 2012
The 30 basis point decrease in our effective tax rate for the fiscal year was
primarily driven by the U.S. legislative retroactive reinstatement of the research
and development tax credit and a reduction of tax reserves on foreign
operations, partially offset by an increase in the percentage of earnings in
higher tax jurisdictions.
Discontinued Operations
During fiscal 2013, we divested of Umbro and Cole Haan, allowing us to focus
our resources on driving growth in the NIKE, Jordan, Converse, and Hurley
brands. The results of the divestiture are presented as discontinued
operations. Please refer to Note 15 — Discontinued Operations in the
accompanying Notes to the Consolidated Financial Statements for more
detail.
Operating Segments
Our reportable operating segments are evidence of the structure of the
Company’s internal organization, which changed beginning in the first quarter
of fiscal 2014. The NIKE Brand segments continue to be defined by
geographic regions for operations participating in NIKE Brand sales activity,
which now includes the results of NIKE Golf and Hurley. Previously, NIKE Golf
and Hurley were combined with Converse and reported as “Other
Businesses.”
Each NIKE Brand geographic segment operates predominantly in one
industry: the design, development, marketing, and selling of athletic footwear,
apparel, and equipment. The Company’s reportable operating segments for
the NIKE Brand are: North America, Western Europe, Central & Eastern
Europe, Greater China, Japan, and Emerging Markets. The Company’s NIKE
Brand DTC operations are managed within each geographic segment.
Converse is also a reportable segment for NIKE, Inc., and operates in one
industry: the design, marketing, licensing, and selling of casual sneakers,
apparel, and accessories. Prior year amounts have been restated to conform
to fiscal 2014 presentation.
As part of our centrally managed foreign exchange risk management
program, standard foreign currency rates are assigned twice per year to each
NIKE Brand entity in our geographic operating segments and Converse.
These rates are set approximately nine months in advance of the future selling
season based on average market spot rates in the calendar month preceding
the date they are established. Inventories and cost of sales for geographic
operating segments and Converse reflect the use of these standard rates to
record non-functional currency product purchases into the entity’s functional
currency. Differences between assigned standard foreign currency rates and
actual market rates are included in Corporate together with foreign currency
hedge gains and losses generated from our centrally managed foreign
exchange risk management program.
NIKE, INC. 2014 Annual Report and Notice of Annual Meeting 69
FORM 10-K