Nike 2016 Annual Report Download - page 13

PART I
imported products are subject to duties, tariffs or quotas that affect the cost
and quantity of various types of goods imported into the United States and
other countries. Any country in which our products are produced or sold may
eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures,
anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on
the transfer of currency, climate change legislation, product safety regulations
or other charges or restrictions, any of which could have an adverse effect on
our results of operations and financial condition.
We could be subject to changes in tax rates, adoption of
new tax laws or additional tax liabilities.
We are subject to the tax laws in the United States and numerous foreign
jurisdictions. Current economic and political conditions make tax rules in any
jurisdiction, including the United States, subject to significant change. There
have been proposals to reform U.S. and foreign tax laws that could
significantly impact how U.S. multinational corporations are taxed on foreign
earnings. Although we cannot predict whether or in what form these
proposals will pass, several of the proposals considered, if enacted into law,
could have an adverse impact on our income tax expense and cash flows.
We earn a substantial portion of our income in foreign countries and are
subject to the tax laws of those jurisdictions. If our capital or financing needs in
the United States require us to repatriate earnings from foreign jurisdictions
above our current levels, our effective income tax rates for the affected
periods could be negatively impacted.
Portions of our operations are subject to a reduced tax rate or are free of tax
under various tax holidays and rulings that expire in whole or in part from time
to time. These tax holidays and rulings may be extended when certain
conditions are met, or terminated if certain conditions are not met. If the tax
holidays and rulings are not extended, or if we fail to satisfy the conditions of
the reduced tax rate, our future effective income tax rate would increase in the
future.
We are also subject to the examination of our tax returns by the United States
Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess
the likelihood of an adverse outcome resulting from these examinations to
determine the adequacy of its provision for income taxes. Although we believe
our tax provisions are adequate, 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. For example, the IRS has
assessed additional tax liabilities for 2011 and 2012 related to a foreign tax
credit matter. We are currently contesting the matter in U.S. Tax Court. In
addition to the risk of additional tax for these years, if this litigation is adversely
determined and the IRS was to seek similar adjustments in subsequent years,
we could be subject to significant additional tax liabilities. Additionally, we and
our subsidiaries are engaged in a number of intercompany transactions
across multiple tax jurisdictions. Although we believe we have clearly reflected
the economics of these transactions and the proper local transfer pricing
documentation is in place, tax authorities may propose and sustain
adjustments that could result in changes that may impact our mix of earnings
in countries with differing statutory tax rates.
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 142 footwear factories located in 15
countries. We do not own or operate any of our own footwear manufacturing
facilities and depend upon independent contract manufacturers to
manufacture all of the footwear products we sell. In fiscal 2016, five footwear
contract manufacturers each accounted for greater than 10% of fiscal 2016
footwear production and in aggregate accounted for approximately 69% of
NIKE Brand footwear production in fiscal 2016. 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, natural and synthetic leather, natural and synthetic
fabrics and threads, nylon, 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, employ and retain adequate personnel. NIKE contractors and
suppliers buy raw materials 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 and increases in compliance costs due to
governmental regulation concerning certain metals used in the manufacturing
of our products. 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 make 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
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