Income Statement

First-Time Consolidation of Reebok Impacts 2006 Results
The business of Reebok International Ltd. (USA) and its subsidiaries, which was acquired to broaden the adidas Group’s product offering and to increase the Group’s long-term growth opportunities, is consolidated within the adidas Group as of February 1, 2006. The adidas Group’s 2006 reported financial results were significantly impacted by this consolidation. Most visible is the strong increase in Group sales. The Group’s gross and operating margins, however, were negatively impacted by Reebok’s lower than Group average margins as well as accounting effects from purchase price allocation such as the impact of fair values charged to expense in the income statement (see Reebok Business Performance). In addition, the Group’s IBT was negatively impacted by the financing of the Reebok acquisition, which led to a significant increase of the Group’s financial expenses in 2006. The performance of this business is shown in the Reebok segment. Reebok’s results are not comparable with 2005 reported results for several reasons (see Reebok Business Performance). As a consequence, no prior year figures for the Reebok segment are given at the Group level. However, to show Reebok’s comparable development, prior year sales figures are provided in the Reebok section of this report.

Exceptional Factors Impact 2006 Operational Performance
In 2006, several other exceptional factors influenced the reported operating results for the Group and the segments. Over the course of the year, brand adidas was positively influenced by strong sales related to the 2006 FIFA World Cup™, which took place in our home market Germany and for which adidas was Official Sponsor, Supplier and Licensee. TaylorMade-adidas Golf was positively impacted by the inclusion of the Greg Norman apparel business until the end of November, when the business was divested. Sales recorded in the HQ/Consolidation segment increased strongly, positively impacted by € 86 million of sales related to the Group’s cooperation agreement with Amer Sports Corporation, under which the adidas Group sources softgoods for Salomon at a fixed buying commission for a limited period in an effort to support the transfer of Salomon’s business activities to Amer Sports Corporation. However, this agreement includes margins significantly below the Group’s average and therefore negatively impacted the Group’s gross and operating margin development in 2006. In addition, Reebok’s operating margin was negatively impacted by additional costs in connection with the closure of production facilities at manufacturing partners in Indonesia in the fourth quarter of 2006. The Group’s minority interests were impacted by the purchase of the remaining 9% of shares from the joint venture partner of the adidas subsidiary in India as well as by the purchase of the remaining 49% of shares from the joint venture partner of the adidas subsidiary in Korea, effective February 1, 2006 and September 1, 2006, respectively (see Note 5).

Net Sales € in millions

Net Sales by Quarter € in millions

Group Sales Surpass € 10 billion in 2006
In 2006, Group sales increased 53% on a currency-neutral basis, strongly supported by the first-time consolidation of Reebok. In euro terms, Group revenues grew 52% to € 10.084 billion in 2006 from € 6.636 billion in 2005, exceeding the € 10 billion level for the first time in the Group’s history. Sales for the adidas Group excluding Reebok increased 14% on a currency-neutral basis. Double-digit growth was generated in all regions except Europe, where sales increased by high-single-digit rates. Sales for the adidas Group excluding Reebok grew 14% in euro terms to € 7.548 billion in 2006 from € 6.636 billion in the prior year, representing the highest organic growth of the adidas Group within the last eight years.

Double-Digit Growth at adidas and TaylorMade-adidas Golf
The adidas segment was the main driver of the Group’s organic sales growth in 2006. Currency-neutral adidas revenues grew 14% in 2006 driven by increases in nearly all Sport Performance categories as well as double-digit growth in the Sport Heritage and Sport Style divisions. First-time consolidation of the Reebok segment added € 2.473 billion in sales to the adidas Group. At TaylorMade-adidas Golf, currency-neutral revenues increased 22%. This strong performance was driven by solid growth in nearly all major product categories. Further, the inclusion of the Greg Norman apparel business, which was acquired as part of the Reebok acquisition, also had a positive impact on the Group’s sales development. Sales recorded in the HQ/Consolidation segment increased by 97% on a currency-neutral basis, as a result of the Group’s cooperation agreement with Amer Sports Corporation. Currency translation effects had only a minor negative impact on sales in euro terms. adidas sales in euros increased 13% to € 6.626 billion in 2006 from € 5.861 billion in 2005. TaylorMade-adidas Golf sales in euro terms grew 21% to € 856 million in 2006 from € 709 million in 2005. HQ/Consolidation sales in euro terms increased 96% to € 129 million in 2006 from € 66 million in 2005. 

Net Sales by Segment¹⁾

Net Sales by Region¹⁾

Net Sales by Region € in millions 

Sales Increase Strongly in All Regions
adidas Group sales grew robustly in all regions driven by the first-time inclusion of Reebok as well as strong revenue increases at both adidas and TaylorMade-adidas Golf. Group sales in Europe grew 32% on a currency-neutral basis. This represents an improvement of 31% in euro terms to € 4.162 billion in 2006 from € 3.166 billion in the prior year. Currency-neutral sales in Europe for the adidas Group excluding Reebok increased 8% due to adidas’ strongest growth in three years. In euro terms, this represents an increase of 7% to € 3.390 billion in 2006 from € 3.166 billion in the prior year. In North America, Group sales increased 107% on a currency-neutral basis. In euro terms, sales also grew 107% to € 3.234 billion in 2006 from € 1.561 billion in 2005. Currency-neutral sales in North America for the adidas Group excluding Reebok increased 14% driven by double-digit growth rates at both adidas and TaylorMade-adidas Golf. In euro terms, revenues increased 13% to € 1.768 billion in 2006 from € 1.561 billion in the prior year. Sales for the adidas Group in Asia increased 35% on a currency-neutral basis. In euro terms, revenues in Asia grew 33% to € 2.020 billion in 2006 from € 1.523 billion in 2005. Currency-neutral sales in Asia for the adidas Group excluding Reebok increased 20% during the period, primarily driven by strong growth at brand adidas. This marks the third consecutive year of double-digit underlying growth for our Group in the region. In euro terms, revenues grew 18% to € 1.791 billion in 2006 from
€ 1.523 billion in the prior year. In Latin America, currency-neutral sales increased 53%. In euro terms, sales grew 56% to € 499 million in 2006 from € 319 million in 2005. Currency-neutral sales in Latin America for the adidas Group excluding Reebok increased 31% in 2006. This represents the highest regional growth within the Group as a result of continued strong development of the adidas brand. In euro terms, sales increased 35% to € 429 million from € 319 million in the prior year.

Currency-Neutral Net Sales Growth by Segment and Region¹⁾ in % 

Net Sales Growth in € by Segment and Region¹⁾ in %

Strong Sales Increase in All Product Categories
Sales increased strongly in all categories, driven by the first-time inclusion of Reebok as well as strong operational developments at adidas and TaylorMade-adidas Golf. Group footwear sales increased 60% on a currency-neutral basis. In euro terms, footwear sales grew 59% to € 4.733 billion in 2006 from € 2.978 billion in 2005. Currency-neutral footwear sales for the adidas Group excluding Reebok grew 10%, driven by strong growth in nearly all adidas Sport Performance categories, particularly in football, as well as double-digit increases in the Sport Heritage division and in adidas Golf. In euro terms, footwear sales for the adidas Group excluding Reebok grew 10% to € 3.263 billion in 2006 from € 2.978 billion in the prior year. Currency-neutral apparel sales were up 48% in 2006. In euro terms, apparel sales grew 47% to € 4.105 billion in 2006 from € 2.798 billion in the prior year. For the adidas Group excluding Reebok, apparel revenues increased 20% on a currency-neutral basis. This represents the highest underlying growth rate for this product category in nine years, driven by strong increases in all major adidas Sport Performance categories, particularly in football. In addition, solid growth in the adidas Sport Heritage division and in adidas Golf drove this positive development. In euro terms, apparel sales for the adidas Group excluding Reebok grew 19% to € 3.322 billion in 2006 from € 2.798 billion in 2005. Hardware sales increased 45% on a currency-neutral basis in 2006. In euro terms, the increase was 45% to € 1.246 billion in 2006 from € 860 million in 2005. Currency-neutral hardware sales for the adidas Group excluding Reebok were up 13%. Double-digit growth in the adidas balls category due to the strong product offering at the 2006 FIFA World Cup™ as well as double-digit growth rates in irons and golf balls at TaylorMade drove this strong development. In addition, solid growth rates in the TaylorMade metalwoods category positively impacted the strong sales increase. In euro terms, sales for the adidas Group excluding Reebok increased 12% to € 963 million in 2006 from € 860 million in the prior year. 

Net Sales by Product Category¹⁾

Net Sales by Product Category  € in millions

Cost of Sales Growth Largely in Line with Revenue Increase
Our Group defines cost of sales as the amount we pay to third parties for expenses associated with producing and delivering our products. Similarly, although only representing a very small portion of total cost of sales, own-production expenses at adidas and Reebok as well as assembling expenses at TaylorMade-adidas Golf are also included in the Group’s cost of sales. In 2006, cost of sales was € 5.589 billion, representing an increase of 63% from € 3.439 billion in 2005. This reflects higher sourcing costs necessitated by the first-time consolidation of the Reebok business. For the adidas Group excluding Reebok, cost of sales grew 15% to € 3.943 billion in 2006 from € 3.439 billion in 2005, broadly in line with the strong organic sales growth during the period. Increasing labor and raw material costs were largely compensated by efficiency gains within our supply chain as well as positive impacts from an improved business and product mix. 

Gross Margin in % 
 

Gross Profit € in millions

Gross Profit by Quarter € in millions

Group Gross Profit Increases 41%
The Group’s gross margin declined 3.6 percentage points to 44.6% of sales in 2006 (2005: 48.2%), mainly reflecting the first-time consolidation of Reebok, which more than offset a positive gross margin development in the adidas segment. Due to Reebok’s strong presence in North America, where average gross margins are lower than in other regions, Reebok carries a significantly lower gross margin than the Group average. In addition, Reebok’s gross profit in 2006 includes negative impacts from purchase price allocation in an amount of € 76 million. As a result of the Group’s strong top-line growth, gross profit rose by 41% in 2006 to reach € 4.495 billion versus € 3.197 billion in the prior year. For the adidas Group excluding Reebok, gross margin decreased 0.4 percentage points to 47.8% in 2006 (2005: 48.2%), mainly due to a gross margin decline in the Group’s HQ/Consolidation segment as a result of the Group’s cooperation agreement with Amer Sports Corporation, which more than offset the gross margin increase at adidas. The gross margin of TaylorMade-adidas Golf declined marginally as a result of the inclusion of the Greg Norman apparel business. Gross profit for the Group excluding Reebok grew by 13% to € 3.605 billion in 2006 (2005: € 3.197 billion).

Royalty and Commission Income Grows Strongly
Royalty and commission income for the adidas Group increased 94% on a currency-neutral basis, mainly driven by the first-time consolidation of the Reebok business. In euro terms, royalty and commission income increased by 91% to € 90 million in 2006 from € 47 million in the prior year. Royalty and commission income for the adidas Group excluding Reebok increased 19% on a currency-neutral basis due to higher royalty and commission income at brand adidas. An increased number of units sold as well as higher average royalty rates drove this development. In euro terms, royalty and commission income for the adidas Group excluding Reebok grew 18% to € 56 million in 2006 from € 47 million in 2005. 

Operating Expenses € in millions

Operating Expenses  in % of net sales

Operating Expenses as a Percentage of Sales Decrease
Group operating expenses, including depreciation and amortization (excluding goodwill), are influenced by two components: marketing working budget and operating overhead costs. Operating expenses as a percentage of sales declined 1.5 percentage points to 36.7% in 2006 from the 2005 level of 38.2%. This decrease mainly reflects Reebok’s lower than Group average operating expense level despite negative effects from purchase price allocation. In absolute terms, operating expenses increased by 46% to € 3.704 billion in 2006 from € 2.537 billion in 2005. For the adidas Group excluding Reebok, operating expenses as a percentage of sales were 38.0% in 2006, which is 0.2 percentage points lower than the 2005 level of 38.2%. Continued efficiency improvements in operating overhead costs more than offset higher marketing expenses related to the 2006 FIFA World Cup™. In absolute terms, operating expenses for the adidas Group excluding Reebok increased by 13% to € 2.872 billion in 2006 from € 2.537 billion in 2005.

Operating Expenses € in mililons

Marketing Working Budget in% of net sales 

Operating Overheads Decrease as a Percentage of Sales
Group operating overheads include overhead costs related to marketing, sales, logistics, research and development as well as central finance and administration functions. Operating overhead expenses as a percentage of sales declined 0.2 percentage points to 23.8% in 2006 from 24.0% in the prior year as a result of the first-time consolidation of Reebok. Excluding Reebok, operating overheads as a percentage of sales were stable at 24.0% as a result of lower administrative costs within the Group’s headquarter functions which more than offset higher own-retail expenditures at brand adidas. 

No Amortization of Goodwill and Trademarks Incurred
In accordance with International Financial Reporting Standards, intangible assets with unlimited useful lives (goodwill and trademarks) are tested annually and additionally when there are indications of potential impairment. In 2006, as well as in 2005, no impairment was incurred.

Operating Margin in % 

Operating Profit € in millions

Operating Profit by Quarter € in millions

Operating Profit Grows 25%
Group operating margin declined 1.9 percentage points to 8.7% of sales in 2006 (2005: 10.7%). This mainly reflects the first-time consolidation of the Reebok business, which carries a significantly lower operating margin than the Group average. The segment’s operating margin also includes a negative impact from purchase price allocation on cost of sales and operating expenses in a total amount of € 89 million. The first cost synergies related to the Reebok integration, which we expect to positively impact the Group’s operating margin from 2007 onwards, were offset by one-time costs in 2006. As a result of strong sales growth, however, operating profit for the adidas Group rose 25% in 2006 to reach € 881 million versus € 707 million in 2005. For the adidas Group excluding Reebok, the operating margin decreased 0.2 percentage points to 10.5% in 2006 from 10.7% in the prior year. An operating margin decline in the Group’s HQ/Consolidation segment as a result of the Group’s cooperation agreement with Amer Sports Corporation more than offset operating margin increases at both adidas and TaylorMade-adidas Golf. Operating profit for the adidas Group excluding Reebok grew by 12% to € 789 million in 2006 from € 707 million in the prior year. 

Reebok Acquisition Drives Net Financial Expenses Increase
Net financial expenses increased 203% to € 158 million in 2006 from € 52 million in the prior year. This reflects the financing of the Reebok acquisition. The cash outflow for this transaction occurred at the end of January 2006.

Net Financial Expenses € in millions

Financial Income Down 5%
Financial income decreased 5% to € 39 million in 2006 from € 42 million in the prior year. This reflects the reduction in the Group’s cash position after the acquisition of Reebok in January 2006.

Financial Expenses Increase due to Reebok Acquisition
Financial expenses increased 111% to € 197 million in 2006 (2005: € 94 million), particularly as a result of the financing of the Reebok acquisition. An increase of the weighted average interest rate also had an impact on this development (see Treasury).

Income Before Taxes Up 10%
As a result of the operating improvements in the adidas and TaylorMade-adidas Golf segments, income before taxes (IBT) increased 10% to € 723 million in 2006 from € 655 million in 2005. As a percentage of sales, however, IBT decreased by 2.7 percentage points to 7.2% in 2006 from 9.9% in 2005, reflecting the Group’s lower operating margin as well as the significant increase in net financial expenses related to the Reebok acquisition.

Income Before Taxes € in millions

Income Before Taxes by Quarter € in millions

Net Income From Continuing Operations Grows 14%
The Group’s net income from continuing operations increased 14% to € 496 million in 2006 from € 434 million in 2005. The Group’s strong sales increase was the main driver of this improvement. In addition, net income was positively impacted by the lower tax rate, which declined 2.3 percentage points to 31.4% in 2006 (2005: 33.7%), mainly due to a more favorable earnings mix throughout the Group as well as a one-time tax benefit in the fourth quarter of 2006 (see Note 28).

No Income/Loss From Discontinued Operations
In 2006, no income or loss from discontinued operations was incurred. This compares to a loss from discontinued operations in the amount of € 44 million in 2005 related to the Salomon business segment, which was divested in October 2005. 

Minority Interests Increase by 74%
The Group’s minority interests increased 74% to € 13 million in 2006 from € 7 million in the prior year. This increase primarily reflects higher minority interests related to the adidas joint venture in Korea in the first eight months of the year before the adidas Group assumed full ownership of the subsidiary on September 1, 2006. In addition, the first-time consolidation of the Reebok business impacted this development. 

Net Income Attributable to Shareholders € in millions

Net Income Attributable to Shareholders by Quarter € in millions

Net Income Attributable to Shareholders Increases 26%
The Group’s net income attributable to shareholders increased 26% to € 483 million in 2006 from € 383 million in the prior year. This improvement reflects the outstanding performance of the adidas and TaylorMade-adidas Golf segments as well as the non-recurrence of losses from discontinued operations related to the Salomon business in 2005.

Basic and Diluted Earnings Per Share Up 16% and 17%
On June 6, 2006, adidas AG conducted a share split in a ratio of 1:4, with each existing adidas AG share being divided into four shares (see Our Share). All numbers of shares have been restated. The Group’s basic earnings per share from continuing and discontinued operations increased 16% to € 2.37 in 2006 versus € 2.05 in 2005 despite the capital increase conducted on November 3, 2005. The Group’s total number of shares outstanding increased by 489,840 shares in 2006 to 203,536,860 as a result of shares from stock options exercised as part of Tranches II, III and IV of the Management Share Option Plan (MSOP) of adidas AG, as well as the conversion of one tranche of the convertible bond (see Note 22). Consequently, the average number of shares used in the calculation of basic earnings per share was 203,386,104 (2005 average: 186,947,832). Diluted earnings per share from continuing and discontinued operations in 2006 increased 17% to € 2.25 from € 1.93 in the prior year. The dilutive effect mainly results from approximately 16 million potential additional shares that could be created in relation to our outstanding convertible bond, for which conversion criteria were met for the first time at the end of 2004.