Adidas 1997 Annual Report Download - page 10

8
In contrast, positive exchange rate effects
amounted to only DM 2 million in 1997 as
compared to DM 21 million in 1996. This sig-
nificant decline is primarily due to a change
in the accounting treatment with effect from
January 1, 1997. In 1996 unrealized exchange
gains and losses on outstanding hedging
contracts were reflected in exchange rate
effects. As, however, adidas enters into
hedging contracts to protect the cost of
future product purchases, it is more appro-
priate to reflect the gains/losses on these
instruments at the same time as the under-
lying commercial transactions. Accordingly
for 1997 unrealized exchange gains and/or
losses on such outstanding hedging con-
tracts are carried at historical values and
recognized as part of the cost base of the
hedged transactions.
If the Company’s previous accounting treat-
ment for currency options had been contin-
ued in 1997, the net financial result would
have been a net gain of DM 6 million, reflect-
ing the market values of outstanding hedging
contracts.
EXTRAORDINARY INCOME HAS
NO IMPACT ON RESULTS
The recorded extraordinary income in the
amount of DM 22 million has no net impact
on income before taxes, as offsetting ex-
penses
of the same amount are included in
the selling,
general and administrative ex-
penses. The expense and extraordinary
income are directly related to a special reward
and incentive plan for Management sponsored
by two shareholders (Robert Louis-Dreyfus
and Christian Tourres), who supply the shares
which are required to fulfil the Company’s
obligations under the plan.
INCOME BEFORE TAXES INCREASED
BY MORE THAN HALF
Income before taxes (IBT) increased by 52%
to DM 677 million. As a consequence, IBT in
per cent of net sales rose to 10.1% in 1997
(1996: 9.4%). This increase in profit is due
solely to the improvement of the operating
result, as there was a decrease in both royal-
ty and commission income and the net finan-
cial result.
RETURN ON SALES IMPROVED TO 6.9%
For the first time since the initial public offer-
ing in 1995, adidas is able to report double-
digit earnings per ordinary share, which
reached DM 10.25 in 1997.
Indeed, net income rose by 48%, reaching
DM 465 million. Despite the negative impact
from increased income taxes and minority
interests, net income for the year also grew
at a faster rate than net sales. Return on
sales developed accordingly, improving by
0.2 percentage points to 6.9% in 1997.
Minority interests increased from DM 23 mil-
lion in 1996 to DM 26 million in 1997, as a
result of
improved profits at joint venture
companies.
Income taxes increased by 74.1% to DM 186
million in 1997 (1996: DM 107 million). This
has led to an increase in the effective tax rate
for the group, up by 3.5 percentage points to
27.5%. The main reason for the significant
increase in income taxes is the phase-out
of tax losses carried forward in some of the
European subsidiaries and the increased
profitability of subsidiaries in countries with
higher tax rates such as Italy.
1993 1994 1995 1996 1997
Profit Margin on Turnover
(%)
10
9
8
7
6
5
4
3
2
1
nbefore taxes
nnet
n
n
n
n
n
n
n
n
n
1993 1994 1995 1996 1997
Earnings per Share
(DM)
10
9
8
7
6
5
4
3
2
1
n
n
n
n
n
n