Treasury

CORPORATE FINANCING POLICY

In order to be able to meet the company’s payment commitments at all times, the major goal of our financing policy is to ensure sufficient liquidity reserves, while at the same time minimizing our financial expenses. The operating activities of our segments and the resulting cash inflows represent the company’s main source of liquidity. Liquidity is planned on a rolling quarterly basis under a multi-year financial and liquidity plan. This comprises all consolidated companies. Our in-house bank concept takes advantage of any surplus funds of individual companies to cover the financial requirements of others, thus reducing external financing needs and optimizing our net interest expenses. Furthermore, by settling intercompany transactions via intercompany financial accounts, we are able to reduce external bank account transactions and thus bank charges.

TREASURY POLICY AND RESPONSIBILITIES

Our Treasury Policy governs all treasury-related issues, including banking policy and approval of bank relationships, financing arrangements and liquidity/asset management, currency, interest, commodity and equity risk management as well as the management of intercompany cash flows. Responsibilities are arranged in a three-tiered approach:

• The Treasury Committee consists of members of the Executive Board and other senior executives who decide on the Treasury Policy and provide strategic guidance for managing treasury-related topics. Major changes to our Treasury Policy are subject to the prior approval of the Treasury Committee.
• The Treasury department is responsible for specific centralized treasury transactions and for the global implementation of our Treasury Policy.
• On a subsidiary level, where applicable and economically reasonable, local managing directors and finance directors are responsible for managing treasury matters in their respective subsidiaries. Controlling functions on a corporate level ensure that the transactions of the individual business units are in compliance with our Treasury Policy.

CENTRALIzED TREASURY FUNCTION

In accordance with our Treasury Policy, all worldwide credit lines are directly or indirectly managed by the Treasury department. Portions of those lines are allocated to our subsidiaries and sometimes backed by adidas AG guarantees. As a result of this centralized liquidity management, the company is well positioned to allocate resources efficiently throughout the organization. The company’s debt is generally unsecured and may include standard covenants, which are reviewed on a quarterly basis. We maintain good relations with numerous partner banks, thereby avoiding a high dependency on any single financial institution. Banking partners of the company and our subsidiaries are required to have at least a BBB+ long-term investment grade rating by Standard & Poor’s or an equivalent rating by another leading rating agency. see Note 02 We authorize our companies to work with banks with a lower rating only in very exceptional cases. To ensure optimal allocation of the company’s liquid financial resources, subsidiaries transfer excess cash to our headquarters in all instances where it is legally and economically feasible. In this regard, the standardization and consolidation of our global cash management and payment processes, including automated domestic and cross-border cash pools, is a key priority for our centrally managed Treasury department. Effective management of our currency exposure and interest rate risks are additional goals and responsibilities of the department.

STANDARD COVENANTS

In the case of our committed credit facilities, we have entered into various legal covenants. These legal covenants may include limits on the disposal of fixed assets, the amount of debt secured by liens, cross-default provisions and change of control. However, our financial arrangements do not contain any financial covenants. If we failed to meet any covenant and were unable to obtain a waiver, borrowings would become due and payable immediately. As at December 31, 2019, we were in full compliance with all our covenants. We are fully confident we will continue to be compliant with these covenants going forward. We believe that cash generated from operating activities, together with access to internal and external sources of funds, will be sufficient to meet our future operating and capital needs.

FINANCIAL FLEXIBILITY

The company’s financial flexibility is ensured by the availability of credit facilities, consisting of committed and uncommitted bilateral credit lines at different banks with a remaining time to maturity of up to eight years. In addition, we have an unused multi-currency commercial paper program in the amount of € 2.0 billion available (2018: € 2.0 billion). At the end of 2019, committed and uncommitted bilateral credit lines amounted to € 2.105 billion (2018: € 2.215 billion), of which € 1.940 billion was unutilized (2018: € 2.008 billion). Committed and uncommitted credit lines represent approximately 46% and 54% of total short-term bilateral credit lines, respectively (2018: 45% and 55%, respectively). We monitor the ongoing need for available credit lines based on the current level of debt as well as future financing requirements.

Total credit facilities € in millions

Remaining time to maturity of available facilities € in millions

Bilateral credit lines € in millions

OUTSTANDING BONDS

The company has two outstanding eurobonds, both issued in 2014, and one outstanding equity-neutral convertible bond, which was issued in 2018. The seven-year eurobond of € 600 million matures on October 8, 2021 and has a coupon of 1.25%. The twelve-year eurobond of € 400 million matures on October 8, 2026 and has a coupon of 2.25%. The equity-neutral convertible bond of € 500 million was issued on September 5, 2018, with a coupon of 0.05% and is due on September 12, 2023. see Our Share See note 18

GROSS BORROWINGS DECREASE

The company’s gross borrowings, the vast majority of which are denominated in euro, are composed of bank borrowings as well as the outstanding eurobonds and the equity-neutral convertible bond. Gross borrowings decreased 2% to € 1.638 billion at the end of 2019 from € 1.676 billion in the prior year. The total amount of bonds outstanding at the end of 2019 was € 1.473 billion (2018: € 1.469 billion). Bank borrowings amounted to € 165 million compared to € 207 million in the prior year.

STABLE DEBT MATURITY PROFILE

Over the course of 2019, the company’s financing maturity profile remained stable. In 2020, assuming unchanged maturities, debt instruments of € 43 million will mature. This compares to € 66 million which matured during the course of 2019.

Remaining time to maturity of gross borrowings € in millions

NET CASH POSITION OF € 873 MILLION

Net cash at December 31, 2019 amounted to € 873 million, compared to net cash of € 959 million in 2018, representing a decrease of € 86 million versus the prior year. The increase in cash generated from operating activities was more than offset by the utilization of cash for the purchase of fixed assets, the repurchase of adidas AG shares as well as the dividend paid to shareholders.

Net cash/(net borrowings)¹ € in millions

INTEREST RATE DECREASES

The weighted average interest rate on the company’s gross borrowings decreased to 1.5% in 2019 (2018: 2.1%). This development was mainly due to the € 500 million equity-neutral convertible bond with a coupon of 0.05% and a reduction of interest rates of short-term borrowings. Fixed-rate financing represented 99% of total gross borrowings at the end of 2019 (2018: 97%). Variable-rate financing accounted for 1% of total gross borrowings at the end of the year (2018: 3%).

Interest rate development¹ in %

EFFECTIVE foreign exchange MANAGEMENT A KEY PRIORITY

As a globally operating company, adidas is exposed to currency risks. Therefore, effective currency management is a key focus of our Treasury department, with the aim of reducing the impact of currency fluctuations on non-euro-denominated net future cash flows. In this regard, hedging US dollars is a central part of our program. This is a direct result of our Asian-dominated sourcing, which is largely denominated in US dollars. see Global Operations In 2019, our Treasury department managed a net deficit of around US $ 7.1 billion related to operational activities (2018: US $ 6.0 billion). Thereof, around US $ 4.7 billion was against the euro (2018: US $ 3.8 billion). As governed by our Treasury Policy, we have established a hedging system on a rolling basis up to 24 months in advance, under which the vast majority of the anticipated seasonal hedging volume is secured approximately six months prior to the start of a season. In rare instances, hedges are contracted beyond the 24-month horizon. We had largely covered our anticipated hedging needs for 2020 as at year-end 2019. At the same time, we have already started hedging our exposure for 2021. The use or combination of different hedging instruments, such as forward exchange contracts, currency options and swaps, protects us against unfavorable currency movements. See note 30