Nike 2012 Annual Report Download - page 29

PART II
Fiscal 2012 Compared to Fiscal 2011
For fiscal 2012, Corporate expense grew $111 million, mainly due to an
increase of $49 million in performance-based compensation and a year-over-
year net increase of $73 million from foreign currency impacts. These foreign
currency impacts were driven by a year-over-year increase in foreign currency
net losses, arising from certain Euro/U.S. Dollar foreign currency hedges and
the re-measurement of monetary assets and liabilities in various
non-functional currencies, net of related undesignated forward instruments,
as a variety of foreign currencies weakened against the U.S. Dollar year-over-
year. The above impacts were partially offset by a slight decrease in centrally
managed operating overhead expenses.
Fiscal 2011 Compared to Fiscal 2010
For fiscal 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 fiscal 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 first quarter of fiscal 2011
and a lower estimated fair value for stock options granted in the current year.
These benefits more than offset an increase in corporate operating overhead
expenses, primarily driven by higher wage-related expense.
Foreign Currency Exposures and Hedging Practices
Overview
As a global company with significant operations outside the United States, in
the normal course of business we are exposed to risk arising from changes in
currency exchange rates. Our primary foreign currency exposures arise from
the recording of transactions denominated in non-functional currencies and
the translation of foreign currency denominated results of operations, financial
position and cash flows, such as the Euro and Chinese Renminbi, into
U.S. Dollars.
Our foreign exchange risk management program is intended to lessen both
the positive and negative effects of currency fluctuations on our reported
consolidated results of operations, financial position and cash flows. We
manage global foreign exchange risk centrally on a portfolio basis to address
those risks that are material to NIKE, Inc. 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 the remaining
material exposures using derivative instruments such as forward contracts
and options. As described below, the implementation of our foreign currency
adjustment program enhanced our ability to manage our foreign exchange
risk on a portfolio basis by increasing the natural offsets and currency
correlation benefits that exist within our portfolio of aggregate foreign
exchange exposure. Our hedging policy is designed to partially or entirely
offset the impact of exchange rate changes on the underlying net exposures
being hedged. Where hedged, our program has the effect of delaying the
impact of current market rates on our consolidated financial statements; the
length of the delay is dependent upon hedge horizons. We do not hold or
issue derivative instruments for trading purposes.
Transactional exposures
We conduct business in various currencies and have transactions which
subject us to foreign currency risk. Our most significant transactional foreign
currency exposures are:
• Product Costs — NIKE’s product costs are exposed to fluctuations in
foreign currencies in the following ways:
1. Non-functional currency denominated product purchases:
a. Certain NIKE entities purchase product from the NIKE Trading
Company (“NTC”), a wholly-owned centralized sourcing hub that
buys NIKE branded products from external factories,
predominantly in U.S. Dollars. The NTC, whose functional
currency is the U.S. Dollar, then sells the products to NIKE
entities in their respective functional currencies. When the NTC
sells to a NIKE entity with a different functional currency, the
result is a foreign currency exposure for the NTC.
b. Other NIKE entities purchase product directly from external
factories in U.S. Dollars. These purchases generate a foreign
currency exposure for those NIKE entities with a functional
currency other than the U.S. Dollar.
In both purchasing scenarios, a weaker U.S. Dollar reduces the
inventory cost incurred by NIKE whereas a stronger U.S. Dollar
increases its cost.
2. Factory input costs: In January 2012, NIKE implemented a foreign
currency adjustment program with certain factories. The program is
designed to more effectively manage foreign currency risk by
assuming certain of the factories’ foreign currency exposures, some
of which are natural offsets to our existing foreign currency exposures.
Under this program, our payments to these factories are adjusted for
rate fluctuations in the basket of currencies (“factory currency
exposure index”) in which the labor, materials and overhead costs
incurred by the factories in the production of NIKE branded products
(“factory input costs”) are denominated.
For the currency within the factory currency exposure indices that is
the local or functional currency of the factory, the currency rate
fluctuation affecting the product cost is recorded within inventories
and is recognized in cost of sales when the related product is sold to a
third-party. All currencies within the indices, excluding the U.S. Dollar
and the local or functional currency of the factory, are recognized as
embedded derivatives and are recorded at fair value through other
expense (income), net. Refer to Note 16 — Risk Management and
Derivatives for additional detail.
As an offset to the impacts of the fluctuating U.S. Dollar on our
non-functional currency denominated product purchases described
above, a strengthening U.S. Dollar against the foreign currencies
within the factory currency exposure indices decreases NIKE’s
U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar
against the indexed foreign currencies increases our inventory cost.
• Non-Functional Currency Denominated External Sales — A portion of our
Western Europe and Central & Eastern Europe geography revenues are
earned in currencies other than the Euro (e.g. British Pound, Polish Zloty)
but are recognized at a subsidiary that uses the Euro as its functional
currency. These sales generate a foreign currency exposure.
• Other Costs — Non-functional currency denominated costs, such as
endorsement contracts, intercompany royalties and other intercompany
charges, generate foreign currency risk to a lesser extent.
• Non-Functional Currency Denominated Monetary Assets and Liabilities —
Our global subsidiaries have various assets and liabilities, primarily
receivables and payables, denominated in currencies other than their
functional currencies. These balance sheet items are subject to
re-measurement, which may create fluctuations in other expense (income),
net within our consolidated results of operations.
NIKE, INC. Š2012 Form 10-K 29