as at June 30, 2012
03.7
01
General
The interim consolidated financial statements of adidas AG and its direct and indirect subsidiaries (collectively the “Group”) for the first half year ending June 30, 2012 are prepared in compliance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU). The Group applied all International Financial Reporting Standards and Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) effective as at June 30, 2012.
These interim consolidated financial statements have been prepared in compliance with International Accounting Standard IAS 34 “Interim Financial Reporting” and with German Accounting Standard GAS 16
“Interim Financial Reporting”. Accordingly, these interim consolidated financial statements do not include all of the information and notes required for consolidated financial statements at financial year-ends.
Therefore, these interim consolidated financial statements should be read in conjunction with the 2011 annual consolidated financial statements. The accounting policies as well as principles and practices applied in the consolidated financial statements for the year ending December 31, 2011 also apply to the interim consolidated financial statements for the first half year ending June 30, 2012.
An exemption to this principle is the application of new/revised standards and interpretations which are effective for financial years starting from January 1, 2012. The application of new/revised standards does not have any material impact on the Group’s financial position, results of operations and cash flows.
The interim consolidated financial statements and the interim Group management report have not been audited in accordance with § 317 German Commercial Code (Handelsgesetzbuch – HGB) or reviewed by an auditor.
Costs that are incurred unevenly during the financial year are anticipated or deferred in the interim consolidated financial statements only if it would be also appropriate to anticipate or defer such costs at the end of the financial year.
The results of operations for the first half year ending June 30, 2012 are not necessarily indicative of results to be expected for the entire year.
02
Seasonality
The sales of the Group in certain product categories are seasonal and therefore revenues and attributable earnings may vary within the financial year. Sales and earnings tend to be strongest in the first and third quarters of the financial year because these coincide with the launch of the spring/summer and fall/winter collections, respectively. This is especially relevant for the adidas and Reebok brands, whose sales account for approximately 90% of the Group’s net sales. However, shifts in the share of sales and attributable earnings of particular product categories, brands or the regional composition may occur throughout the year.
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03
Acquisitions of subsidiaries
Effective June 1, 2012, Taylor Made Golf Co., Inc. completed its acquisition of Adams Golf, Inc. (“Adams Golf”). Based in Plano, Texas (USA), Adams Golf designs, assembles, markets and distributes golf clubs. With this acquisition, the adidas Group intends to further improve its market position within the golf industry. The entire business of Adams Golf was purchased for a purchase price in the amount of US $ 89 million in cash.
The acquisition had the following effect on the Group’s assets and liabilities, based on preliminary purchase price allocation:
Net assets of Adams Golf, Inc. at the acquisition date € in millions
Pre-acquisition carrying amounts
Fair value adjustments
Recognised values on acquisition
Cash and cash equivalents 14 – 14
Accounts receivable 28 – 28
Inventories 17 6 23
Other current assets 0 – 0
Property, plant and equipment 1 – 1
Trademarks – 11 11
Other intangible assets 1 3 4
Deferred tax assets 9 1 10
Other non-current assets 0 – 0
Accounts payable (5) – (5)
Other current provisions (4) – (4)
Current accrued liabilities (3) – (3)
Other current liabilities (0) – (0)
Deferred tax liabilities – (8) (8)
Net assets 58 13 71
Goodwill arising on acquisition 0
Purchase price settled in cash 71
Less: cash and cash equivalents acquired (14)
Cash outflow on acquisition 57
The following valuation methods for the acquired assets were applied;
– Inventories: For finished goods, the “comparative sales method”
was used, which estimates the expected sales price of the respective inventory, reduced for all costs expected to be incurred in its completion/disposition and a profit on those costs. The value of the component parts was determined by estimating the cost to replace each component.
– Trademarks and other intangible assets: The “relief- from-royalty method” was applied for the trademarks/trade names as well as for patents and technology. The fair value was determined by discounting notional royalty savings after tax and adding a tax amortisation benefit, resulting from the amortisation of the acquired asset.
For the valuation of customer contracts and related customer relationships, the “distributor method” was used under the “income approach”.
The excess of the acquisition cost paid versus the net of the amounts of the fair values assigned to all assets acquired and liabilities assumed, taking into consideration the respective deferred taxes, was recognised as goodwill. Any acquired asset that did not meet the identification and recognition criteria for an asset was included in the amount recognised as goodwill.
The goodwill arising on this acquisition was allocated to the cash-generating unit TaylorMade-adidas Golf at the time of the acquisition. The goodwill is denominated in US dollars as the local functional currency.
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Q 2 / 2 012 03.7 Selected Explanatory Notes to the Interim Consolidated Financial Statements
If the acquisition had occurred on January 1, 2012, total Group net sales would have been € 7.4 billion and net income would have been
€ 461 million for the first half year ending June 30, 2012.
The acquired subsidiary contributed net losses of € 2 million to the Group’s net income for the period from June 1 to June 30, 2012.
04
Assets/liabilities classified as held for sale
The composition of assets/liabilities classified as held for sale is unchanged versus March 31, 2012.
05
Borrowings and credit lines
In mid-March, adidas AG issued a convertible bond, due June 14, 2019, for an aggregate nominal amount of € 500 million. The bonds are not callable by the issuer or putable by the bondholders until June 2017.
In addition, the bonds are convertible into 5.99 million new or existing adidas AG shares.
The bonds were priced with a 0.25% annual coupon and a conversion premium of 40% above the reference price of € 59.61, resulting in a conversion price of € 83.46. Trading of the convertible bond commenced on the Frankfurt Stock Exchange (“Freiverkehr”) on April 12, 2012.
A dilutive effect from potential shares arising from the convertible bond does not apply as the conversion option is currently not in the money.
At the end of July 2012, adidas AG signed a € 500 million revolving credit facility. The new facility was syndicated as the Group’s € 2 billion revolving credit facility established in October 2005 expires this year.
The new five-year facility incorporates two one-year extension options exercisable at the end of the first and second year.
As at June 30, 2012, the Group had cash credit lines and other long- term financing arrangements totalling € 4.0 billion (December 31, 2011: € 5.2 billion); thereof unused credit lines accounted for
€ 2.3 billion (December 31, 2011: € 3.9 billion).
06
Shareholders’ equity
In the period from January 1, 2012 to June 30, 2012, the nominal capital of adidas AG did not change. Consequently, on June 30, 2012, the nominal capital of adidas AG amounted to € 209,216,186, divided into 209,216,186 registered no-par-value shares (“registered shares”).
07
Other operating income and other operating expenses
Other operating income mainly includes income from the release of accrued liabilities and other provisions as well as sundry income.
Other operating expenses include expenses for marketing, sales and research and development, as well as for logistics and central administration. In addition, they include impairment losses as well as depreciation on tangible assets and amortisation on intangible assets, with the exception of depreciation and amortisation which is included in the cost of sales. In the first half of 2012, depreciation and amortisation expense for tangible and intangible assets (excluding goodwill) and impairment losses amounted to € 125 million (2011:
€ 115 million).
08
Segmental information
Following the Group’s internal management reporting and in accordance with the definition of IFRS 8 “Operating Segments”, six operating segments have been identified: Wholesale, Retail, TaylorMade-adidas Golf, Rockport, Reebok-CCM Hockey and Other Centrally Managed Brands. According to the criteria of IFRS 8 for reportable segments, the business segments Wholesale and Retail are reported separately, while the remaining segments are aggregated under Other Businesses due to their subordinate materiality.
The adidas and Reebok brands are reported under the segments Wholesale, Retail and Other Centrally Managed Brands.
The operating segment TaylorMade-adidas Golf contains the brands TaylorMade, adidas Golf, Ashworth and Adams Golf.
Certain centralised Group functions do not meet the definition of IFRS 8 for a reportable operating segment. This includes functions such as central treasury, global sourcing as well as other headquarter departments. Income and expenses relating to these corporate
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Q 2 / 2 012 03.7 Selected Explanatory Notes to the Interim Consolidated Financial Statements
functions are presented together with other non-allocable items and intersegment eliminations in the reconciliation of segmental operating profit. Segmental operating profit is defined as gross profit minus costs directly attributable to the segment or the group of segments (primarily sales and logistics costs) before marketing working budget expenditures and operating overhead costs not directly attributable.
Segmental assets include accounts receivable and inventories.
Segments (€ in millions)
Wholesale Retail Other Businesses Total
2012 2011 2012 2011 2012 2011 2012 2011
Net sales (non-Group) 1) 4,727 4,292 1,547 1,258 1,067 787 7,341 6,337
Segmental operating profit 1) 1,481 1,388 332 261 319 220 2,132 1,869
Segmental assets 2) 3,243 3,138 782 580 845 663 4,870 4,381
1) First half year.
2) At June 30.
Operating profit (€ in millions)
First half year 2012
First half year 2011
Operating profit for reportable segments 1,813 1,649
Operating profit for Other Businesses 319 220
HQ/Consolidation 175 133
Marketing working budget (747) (675)
Other operating expenses (947) (835)
Royalty and commission income 52 40
Operating profit 665 532
Financial income 17 13
Financial expenses (57) (63)
Income before taxes 625 482
09
Other information
As announced in an ad hoc release on April 30, 2012, the Group has discovered commercial irregularities at Reebok India Company, New Delhi (India), which will likely affect the consolidated financial statements of adidas AG. As investigations into the matter are still ongoing, an exact amount is not yet determinable. The estimated maximum negative impact could be up to a pre-tax amount of
€ 125 million. As these irregularities have been deemed to have occurred prior to the 2012 financial year, the adidas Group might have to restate prior-year consolidated financial statements in line with the requirements of IAS 8.
Additionally, the Group is reorganising and changing its commercial activities at Reebok India Company and is expecting a one-time negative impact of up to € 70 million on the Group’s operating profit
10
Events after the balance sheet date
Between the end of the first half of 2012 and the finalisation of these interim consolidated financial statements on July 30, 2012, there were no major Group-specific matters which we expect to influence our business materially going forward.
Herzogenaurach, July 30, 2012 The Executive Board of adidas AG
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Q 2 / 2 012 04.1 Executive and Supervisory Boards