FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission file number 1-9340
REEBOK INTERNATIONAL LTD.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2678061
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1895 J.W. Foster Boulevard, Canton, Massachusetts 02021
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(Address of principal executive offices) (Zip Code)
(781) 401-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of registrant's common stock, par value $.01
per share, at August 3, 2001 was 58,965,857 shares.
REEBOK INTERNATIONAL LTD.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 2001 and 2000, and December 31, 2000. . . . 3-4
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 2001 and 2000 . . 5
Condensed Consolidated Statements of Cash Flows -
Three and Six Months Ended June 30, 2001 and 2000. . 6-7
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . 8-12
Item 2
Management's Discussion and Analysis of Results
Of Operations and Financial Condition. . . . . . . 13-22
Part II. OTHER INFORMATION:
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . 23
Item 2 Changes in Securities . . . . . . . . . . . . . . . 23
Item 3 Defaults Upon Senior Securities . . . . . . . . . . 23
Item 4 Submission of Matters to a Vote of Security-Holders 23
Item 5 Other Information . . . . . . . . . . . . . . . . 23
Item 6 Exhibits. . . . . . . . . . . . . . . . . . . . . . 24
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
June 30, December 31,
2001 2000 2000
---- ---- ----
(Unaudited) (See Note 1)
Current assets:
Cash and cash equivalents $ 149,859 $ 212,572 $ 268,665
Accounts receivable,
net of allowance for
doubtful accounts
(June 2001,$46,908;
June 2000, $46,532;
December 2000,$48,016) 527,432 496,625 423,830
Inventory 474,952 405,528 393,599
Deferred income taxes 102,279 69,331 101,715
Prepaid expenses and other
current assets 46,727 42,919 37,396
--------- --------- ---------
Total current assets 1,301,249 1,226,975 1,225,205
--------- --------- ---------
Property and equipment, net 136,043 161,255 141,835
Other non-current assets:
Intangibles, net of
amortization 65,513 71,562 64,288
Deferred income taxes 15,418 41,746 18,110
Other 20,123 21,087 13,608
--------- --------- ---------
Total Assets $1,538,346 $1,522,625 $1,463,046
========= ========= =========
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Amounts in thousands, except per share data)
June 30, December 31,
2001 2000 2000
---- ---- ----
(Unaudited) (See Note 1)
Current liabilities:
Notes payable to banks $ 22,148 $ 19,097 $ 8,878
Current portion of
long-term debt 265 85,176 13,813
Accounts payable 158,055 171,964 172,035
Accrued expenses 286,960 310,199 272,076
Income taxes payable 37,945 4,320 21,337
---------- ---------- ----------
Total current liabilities 505,373 590,756 488,139
---------- ---------- ----------
Long-term debt, net of
current portion 351,013 339,843 345,015
Minority interest and other
long-term liabilities 23,115 34,741 22,029
Commitments and contingencies
Stockholders' equity:
Common stock, par value
$.01; authorized 250,000 shares;
issued June 30, 2001, 97,588;
issued June 30, 2000, 95,604;
issued December 31, 2000, 96,209 976 956 962
Retained earnings 1,381,471 1,245,293 1,301,269
Less 38,716 shares in treasury
at cost (653,370) (653,370) (653,370)
Unearned compensation (502) (2,690) (1,402)
Accumulated other
comprehensive income (expense) (69,730) (32,904) (39,596)
---------- ---------- ----------
658,845 557,285 607,863
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,538,346 $1,522,625 $1,463,046
========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 711,048 $ 685,076 $1,480,976 $1,454,905
Costs and expenses:
Cost of sales 449,899 423,614 932,373 902,318
Selling, general and
administrative expenses 227,554 234,799 451,014 469,318
Interest expense, net 4,095 7,166 8,104 12,941
Other (income)expense,net 7,118 1,975 5,742 (1,750)
--------- ---------- -------- ---------
688,666 667,554 1,397,233 1,382,827
--------- ---------- -------- ---------
Income before income
taxes and minority interest 22,382 17,522 83,743 72,078
Income tax expense 6,938 6,606 25,960 27,173
--------- ---------- --------- --------
Income before minority
interest 15,444 10,916 57,783 44,905
Minority interest 1,306 246 2,441 2,523
--------- ---------- --------- --------
Net income $ 14,138 $ 10,670 $ 55,342 $ 42,382
========= ========== ========= ========
Basic earnings per share $ .24 $ .19 $ .95 $ .75
========= ========== ========= ========
Diluted earnings per share $ .24 $ .19 $ .90 $ .74
========= ========== ========= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six months Ended
June 30,
----------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 55,342 $ 42,382
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 18,698 21,508
Minority interest 2,441 2,523
Deferred income taxes 2,128 18,975
Other (11,950) (2,518)
Changes in operating assets and
liabilities:
Accounts receivable (101,546) (84,723)
Inventory (88,826) (4,117)
Prepaid expenses and other (6,554) (1,119)
Accounts payable and accrued expenses 4,428 66,595
Income taxes payable 21,073 (4,495)
---------- ----------
Total adjustments (160,108) 12,629
---------- ----------
Net cash provided by (used for)
operating activities (104,766) 55,011
---------- ----------
Cash flows provided by (used for) investing activities:
Payments to acquire property and
equipment (11,217) (15,135)
Proceeds from business and other non-
operating asset disposals 18,092 30,506
Acquisition of minority interest in
certain subsidiaries and other business
acquisitions (18,832) (1,390)
---------- ----------
Net cash provided by (used for) investing
activities (11,957) 13,981
---------- ----------
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Amounts in thousands)
(Unaudited)
Six Months Ended
June 30,
----------------
2001 2000
---- ----
Cash flows provided by (used for) financing
activities:
Net borrowings (repayments) of notes
payable to banks $ 7,237 $ (7,715)
Net proceeds from issuance of Convertible
Debentures 244,729
Repayments of long-term debt (257,503) (129,976)
Proceeds from issuance of common stock to
employees 19,787 1,667
Dividends to minority shareholders (8,215)
-------- --------
Net cash provided by (used for) financing 6,035 (136,024)
activities ________ ________
Effect of exchange rate changes on cash
and cash equivalents (8,118) (2,140)
-------- --------
Net decrease in cash and cash equivalents (118,806) (69,172)
-------- --------
Cash and cash equivalents at beginning of
period 268,665 281,744
-------- ---------
Cash and cash equivalents at end of period $ 149,859 $ 212,572
======== =========
Supplemental disclosures of cash flow information:
2001 2000
---- ----
Cash paid during the period for:
Interest $ 11,805 $ 22,595
Income taxes 4,710 9,294
The accompanying notes are an integral part of the condensed consolidated
financial statements.
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and reflect all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the interim periods.
The interim financial information and notes thereto should be read in
conjunction with the Company's latest annual report to shareholders. The results
of operations for the three and six months ended June 30, 2001 are not
necessarily indicative of results to be expected for the entire year.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by GAAP for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
Certain amounts in the prior year have been reclassified to conform to the 2001
presentation.
Recently Issued Accounting Standards
- ------------------------------------
As of January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended in June 2000 by Statement of Financial
Accounting Standards no. 138 ("Statement 138") which requires the Company to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure such instruments at fair value. Derivatives that are not hedges must
be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value, as determined by measuring the fair value of
the derivative against the underlying hedge item, is immediately recognized in
earnings. The adoption of these statements did not have a material impact on the
Company's consolidated financial statements.
The Company is exposed to market risk, such as changes in interest rates,
currency exchange rates and material pricing. To manage the volatility related
to these exposures, the Company enters into various derivative transactions in
accordance with its hedging policy. Designation is performed on a specific
exposure basis to support hedge accounting. The changes in fair value of these
hedging instruments are offset in part or in whole by corresponding changes in
the fair value or cash flows of the underlying exposures being hedged. The
Company does not hold or issue derivative financial instruments for trading
purposes.
Interest Rate Hedging
- ---------------------
The Company uses interest rate swap agreements to manage its exposure to
interest rate movements by effectively converting a portion of its variable rate
long-term debt from floating to fixed rates. These agreements are also used to
manage interest rate exposure under certain of the Company's leases. These
agreements involve the exchange of variable rate payments for fixed rate
payments without the effect of leverage and without the exchange of the
underlying principal amount.
Currency Rate Hedging
- ---------------------
The Company enters into forward currency exchange contracts and options to hedge
its exposure for merchandise purchased in U.S. dollars that will be sold to
customers in other currencies.
The Company also uses forward currency exchange contracts and options to hedge
significant intercompany assets and liabilities denominated in other than the
functional currency. Contracts used to hedge intercompany balances are marked to
market and the resulting transaction gain or loss is included in the
determination of net income.
The Company has used forward exchange contracts and options as an element of its
risk management strategy for several years.
As of June 30, 2001, the maximum length of time over which the Company is
hedging its exposure to the variability in future cash flows for forecasted
transactions excluding those forecasted transactions related to the payment of
variable interest on existing financial instruments, is thirteen months. Net
gains in other comprehensive income on June 30, 2001, of $7.9 million, subject
to subsequent fair market value adjustments of the derivatives, will be
reclassified into earnings during the next twelve months when hedged
transactions or cash flows materialize.
During the quarter and six months ended June 30, 2001, the Company recorded a
$0.5 million expense in other income (expense), net representing hedge
ineffectiveness. No gains or losses on derivative instruments' are excluded from
the assessment of hedge effectiveness.
NOTE 2 - SPECIAL CHARGES
- -----------------------
The Company did not record any new special charges during 2001 and 2000, but did
change certain previously recorded estimates. The net change in estimates has
been reported in other income (expense) in the accompanying consolidated
financial statements for the six months ended June 30, 2001.
The change in estimates relates primarily to certain provisions that had been
made with respect to the possible liquidation or sale of the Company's
subsidiary in South Africa. The subsidiary was sold during the first quarter of
2001, and it was determined that certain provisions were no longer necessary.
Details of the special charge activity during the six months ended June 30, 2001
are as follows:
Employee
Legal Severance Marketing Fixed Asset
Total Settlement and Other Contracts Write-downs
Balance, 12/31/00 $ 41,893 $ 15,809 $ 8,764 $ 6,828 $ 10,492
2001 Utilization (16,852) (13,128) (2,584) (1,140)
Change in Estimates (6,810) 3,000 (13) (9,797)
----------------------------------------------------------------------------------
Balance, 12/31/01 $ 18,231 $ 5,681 $ 6,167 $ 5,688 $ 695
----------------------------------------------------------------------------------
The short-term portion of the accrual, or $9,605, is included in accrued
expenses with the balance of $8,626 included in other long-term liabilities. The
remaining accruals are expected to be utilized during fiscal 2001 through 2003,
as leases expire, consolidations occur, contractual obligations come due and
severance payments are made.
NOTE 3 - EARNINGS PER SHARE
- -----------------------------
The following table sets forth the computation of basic and diluted earnings per
share (amounts in thousands, except per share data):
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
2001 2000 2001 2000
------ ----- ----- -----
Numerator for basic earnings per share:
Net income $ 14,138 $ 10,670 $ 55,342 $42,382
====== ====== ====== ======
Numerator for diluted earnings per share:
Net income $ 14,138 $ 10,670 $ 55,342 $42,382
Add: Effect of dilutive securities:
Interest on 4.25% convertible
Debentures net of income taxes 2,463
------ ------ ------ ------
$ 14,138 $ 10,670 $ 57,805 $42,382
====== ====== ====== ======
Denominator for basic earnings per share:
Weighted average shares 58,512 56,688 58,173 56,606
====== ====== ====== ======
Denominator for diluted earnings per share:
Weighted average shares 58,512 56,688 58,173 56,606
Dilutive employee stock options 1,661 762 1,690 494
Effect of dilutive securities:
Assumed conversion of 4.25%
convertible debentures 4,358
------ ------ ------ ------
60,173 57,450 64,221 57,100
====== ====== ====== ======
Basic earnings per share $ .24 $ .19 $ .95 $.75
Diluted earnings per share $ .24 $ .19 $ .90 $.74
The effect of the assumed conversion of the 4.25% convertible debentures has
been excluded from the calculation of EPS for the three months ended June 30,
2001 as the impact would be anti-dilutive.
NOTE 4 - COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income for the quarters ended June 30, 2001 and June 30, 2000 was
$4,053 and $6,729, respectively. Comprehensive income for the six months ended
June 30, 2001 and June 30, 2000 was $25,208 and $34,857, respectively.
Comprehensive income for all periods presented represents net income, changes in
foreign currency translation adjustments and unrealized hedging gains and losses
in accordance with FAS 133.
NOTE 5 - BUSINESS ACQUISITIONS AND DIVESTITURES
- -----------------------------------------------
On March 9, 2001, the Company purchased selected assets of LogoAthletic ("Logo")
for $14.2 million. Included in the assets purchased were inventory, equipment,
facility leases and the rights to Logo's trademarks. Since the acquisition was
not material to the Company's consolidated results, no pro forma information is
provided.
Effective January 1, 2001, the Company increased its ownership share in one of
its European subsidiaries and acquired majority ownership in one of its Latin
America distributors. The impact of these events was not material to the
consolidated financial statements.
Effective January 1, 2001, the Company sold its interest in its South African
subsidiary, which will now operate as an independent distributor. The sale price
and historical operating results of the Company's South African subsidiary are
not material to the consolidated financial results or consolidated financial
position of the Company.
NOTE 6 - CONVERTIBLE DEBENTURES
- -------------------------------
On February 28, 2001 the Company sold $250.0 million in 20-Year Convertible
Debentures in the 144A private placement market. The Convertible Debentures have
an annual coupon rate of 4.25 %, payable in cash semi-annually. The Debentures
are convertible into shares of Reebok common stock at a price of $38.56. The
Company used the net proceeds to re-pay its existing term loan due August 31,
2002.
NOTE 7 - CONTINGENCIES
- ----------------------
The Company is involved in various legal proceedings generally incidental to its
business. While it is not feasible to predict or determine the outcome of these
proceedings, management does not believe that they should result in a materially
adverse effect on the Company's financial position, results of operations or
liquidity.
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements with
regard to the Company's revenues, earnings, spending, margins, cash flow,
orders, inventory, products, actions, plans, strategies and objectives.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or imply future results, performance or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "intend," "plan," "project," "will be," "will continue," "will
result," "could," "may," "might," or any variations of such words or other words
with similar meanings. Any such statements are subject to risks and
uncertainties that could cause the Company's actual results to differ materially
from those discussed in such forward-looking statements. Prospective information
is based on management's then current expectations or forecasts. Such
information is subject to the risk that such expectations or forecasts, or the
assumptions underlying such expectations or forecasts, become inaccurate.
Risks and uncertainties that could affect the Company's actual results and could
cause such results to differ materially from those contained in forward-looking
statements made by or on behalf of the Company include, but are not limited to,
the following: competition; shifts in consumer preferences; the ability to
accurately forecast consumer demand and sales; the ability to sustain current
pricing levels for the Company's products; the potential of the backlog report
to not be indicative of future sales; the effect of the Company's investment in
advertising, marketing, athlete endorsement, and athletic sponsorships; lower
than anticipated sales and increased operating costs at the Company's retail
outlet stores; international sales and manufacturing operations; import
regulations, political instability or general economic factors in the
international regions where the Company conducts its business; interruption or
unavailability of sources of supply; increases in leather prices due to recent
shortages of hides resulting from mad cow and foot-and-mouth disease epidemics
in certain European countries; reliance on independent manufacturers; the
ability to make timely payments on indebtedness; the ability to protect the
Company's intellectual property rights; the ability to realize the full value of
the Company's deferred tax assets; the ability to achieve the intended benefits
from the restructuring of the Company's global operations including operating
and logistical efficiencies in the areas of distribution and information
systems; the effect a strong United States dollar may have on the Company's
results of operations from its international business; and other factors
mentioned or incorporated by reference in this report or other reports. This
list of risk factors is not exhaustive. Other risks and uncertainties are
discussed elsewhere in this report and in further detail under the caption
entitled Issues and Uncertainties included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 which has been filed with
the Securities and Exchange Commission. In addition, the Company operates in a
highly competitive and rapidly changing environment. Therefore, new risk factors
can arise, and it is not possible for management to predict all such risk
factors, nor to assess the impact of all such risk factors on the Company's
business or the extent to which any individual risk factor, or combination of
factors, may cause results to differ materially from those contained in any
forward-looking statement. Accordingly, investors should not place undue
reliance on forward-looking statements as a prediction of actual results.
Operating Results
- -----------------
Second Quarter 2001 Compared to Second Quarter 2000
- ---------------------------------------------------
Net sales for the quarter ended June 30, 2001 were $711.0 million, a 3.8%
increase from 2000's second quarter net sales of $685.1 million. Sales
comparisons are being adversely affected by the weakening of most foreign
currencies against the U.S. dollar. On a constant dollar basis, which eliminates
the effect of currency fluctuations, net sales for the quarter ended June 30,
2001 increased $45.1 million or 6.8%. The Reebok Division's worldwide sales
(including the sales of the Greg Norman Collection and NFL licensed product)
were $588.9 million an 8.7% increase from constant dollar sales of $542.0
million in the second quarter of 2000.
U.S. footwear sales of the Reebok Brand increased 1.0% to $250.3 million in the
second quarter of 2001 from $247.8 million in the second quarter of 2000. During
the quarter, U.S. footwear sales of the Reebok Brand were adversely impacted by
the decrease in the Company's retail outlet sales which declined 5.9%. There
were no significant changes in the number of retail outlet stores operated by
the Company as compared to the prior year's period. The Company believes that
this decrease was primarily the result of a very promotional retail climate in
the U.S. This decline in the Company's retail outlet stores was more than offset
by the increase in the Company's U.S wholesale footwear business. Also during
the quarter, the Company increased its core fill-in business by almost 20%. This
increase in the Company's fill-in business was generated through its automated
replenishment program for certain core styles. U.S. footwear sales in many
categories increased. The basketball category increased 10%, driven by the
strong sell-through success of the Company's Iverson product at retail. The
running category increased 39% and the Classics category increased 19% while the
children's and cross-training categories decreased.
U.S. apparel sales of the Reebok Division (including the sales of the Greg
Norman Collection and NFL licensed product) increased in the second quarter by
56.3% to $81.9 million from $52.4 million in the second quarter of 2000. The
increase from sales was primarily from sales of NFL licensed product. However,
wholesale sales of Reebok branded apparel increased 13.1% as well. Some new
apparel silhouettes with a strategic focus on women's fitness, Iverson and
Classics have resulted in improving sales trends for Reebok branded apparel. The
Company believes that with the addition of its new sports licensing products,
U.S. apparel will be a growth business over the next several years.
International sales of the Reebok Brand (including footwear and apparel) were
$256.7 million in the second quarter of 2001, a decrease of 1.0% from sales of
$259.4 million in the second quarter of 2000. However, the decrease is all due
to currency fluctuations. On a constant dollar basis, international sales of the
Reebok Brand increased $14.9 million or 6.2%. In constant dollars, net sales in
Europe increased 7.8% as compared to the second quarter of 2000. During the
second quarter of 2001 the Company launched its "Defy Convention" global brand
campaign in Europe and increased its working media spend by 75% in the European
market. These initiatives, together with the Company investing in retail
presence in Europe, have helped to drive the sales increase. The Asia Pacific
region reported a constant dollar sales decrease of 5.1% in the quarter. The
Company believes that most of the decline can be attributed to the weak Japanese
economy. In Latin America, the Company's sales to its independent distributors
increased approximately 35% as these distributors increased their purchases to
meet local consumer demand. International categories that generated sales
increases in the second quarter of 2001 were running, walking, and classics.
International categories that decreased in the second quarter of 2001 were men's
cross-training and children's. In constant dollars, international footwear sales
increased approximately 10.0%, and international apparel sales increased by
approximately 1.0%. Effective January 1, 2001, the Company's South Africa
subsidiary was sold and became an independent distributor and the Company
purchased a majority interest in its Mexico distributor which was previously a
joint venture. These changes did not have a material impact on net sales.
Rockport's second quarter 2001 sales were $98.0 million, an increase of 1.2%
from sales of $96.8 million in the second quarter of 2000. Domestic sales for
the Rockport Brand decreased 1.2% whereas international sales increased 9.2% as
compared to the second quarter of 2000. International revenues accounted for
approximately 25% of Rockport's sales in the second quarter of 2001 as compared
to 23% in the second quarter of 2000. The Company attributes the domestic sales
decline to a weak retail climate in the U.S. Rockport's new product
introductions were successful during the second quarter of 2001. However, core
product did slow down in the quarter.
Sales of the Company's Polo Ralph Lauren Footwear products were $24.1 million in
the second quarter of 2001, a decrease of 16.0% from sales of $28.7 million in
the second quarter of 2000. The decline is partially attributable to the weak
department store business in the quarter and partially due to the re-aligning of
the Company's product strategy to conform with that of Polo Ralph Lauren
corporate.During 2001, the Company expects to expand the retail distribution of
its Lauren and Polo Jeans footwear products and to concentrate its design
efforts on developing key items that can become signatures for its various
Ralph Lauren Footwear segments.
The Company has entered into a new exclusive licensing agreement with the
National Football League ("NFL") for apparel, footwear, equipment and
accessories beginning with the 2002 season. In order to support this new
license, in February 2001 the Company purchased selected assets of LogoAthletic
("Logo"). Included in the assets purchased were inventory, equipment, facility
leases and the rights to Logo's trademarks. The total purchase price was $14.2
million. Under this new agreement, the NFL requested that the Company provide
services during the transition year of 2001 and the Company has agreed to
provide these services. In the first quarter of 2001, the Company began shipping
Reebok branded NFL licensed products to retailers. The Company expects 2001
sales of NFL licensed products to be in the range of $75.0 to $125.0 million.
During the second quarter of 2001, the Company's overall gross margin was 36.7%
of sales compared to 38.2% for 2000's second quarter. The primary reasons for
the decline in gross margin in the second quarter is the impact of the weakening
of most foreign currencies against the U.S. dollar and the promotional nature of
the U.S. retail environment. The promotional U.S. retail environment has
resulted in lower maintained margins on closeout products. In addition, although
hide prices for leather have improved recently, margins were somewhat impacted
by increased leather prices in the quarter. The Company believes that based on
current foreign exchange rates and the Company's hedging strategies, the gross
margin percentage for the balance of the year will approximate that which was
achieved in the second quarter of 2001.
Selling, general and administrative expenses for the second quarter of 2001 were
$227.6 million, or 32.0% of sales, as compared to $234.8 million, or 34.3% of
sales in 2000's second quarter. The Company is investing in brand building
initiatives but at the same time it is reducing general and administrative
expenses. As part of its multi-brand strategy to streamline processes and
improve execution, during the second quarter the Company relocated its Rockport
Brand to its new corporate headquarters and integrated it into its Shared
Services operation. The Company expects to continue to generate greater
operating efficiencies for the balance of 2001, and as a result expects selling,
general and administrative expenses to improve by approximately 150 basis points
as a percentage of sales, for the full year as compared to the prior year.
Net interest expense was $4.1 million for the second quarter of 2001, a decrease
of $3.1 million as compared to the second quarter of 2000. The decrease was
primarily a result of debt repayments and refinancings and the Company's cash
position. Outstanding indebtedness has declined $70.7 million from June 30,
2000. For the second quarter of 2001, other income, net was a net expense of
$7.1 million as compared to $2.0 million for the second quarter of 2000. During
the second quarter of 2001, the Company identified an underaccrual of buying
agent's commissions of approximately $10.6 million relating to 2001 and prior
years. In the opinion of the Company, the amounts were not material to any of
the previously reported quarterly or annual periods. Accordingly, the $10.6
million has been recorded in the current quarter in other expense. Also included
in other expense is the cost incurred of $6.7 million for the integration and
consolidation of the Company's brands into the Shared Service Center, a gain of
$8.2 million from the sale of certain real estate assets as well as currency
losses and the amortization of intangibles.
The effective income tax rate was 31.0% in the second quarter of 2001 as
compared to 37.7% in the second quarter of 2000. The reduction from the prior
year is the result of the Company's international tax strategy and changes in
the geographic mix of the total Company's earnings. The Company expects that the
annual tax rate will be 31.0%. However, the rate could fluctuate depending on
where the Company earns income geographically, and, if the Company incurs
non-benefitable losses in certain jurisdictions, the rate could increase.
First Six Months 2001 Compared to First Six Months 2000
- -------------------------------------------------------
Net sales for the six months ended June 30, 2001 were $1.481 billion, an
increase of 1.8% from sales of $1.455 billion in the first six months of 2000.
Sales comparisons are being adversely affected by the weakening of most foreign
currencies against the U.S. dollar. On a constant dollar basis, which eliminates
the effect of currency fluctuations, net sales for the six months ended June 30,
2001 increased $70.6 million or 5.0%. The Reebok Division's worldwide sales
(including the sales of the Greg Norman Collection and NFL licensed product)
were $1.231 billion a 6.1% increase from constant dollar sales of $1.160 billion
in the first six months of 2000.
U.S. footwear sales of the Reebok Brand increased 2.2% to $512.5 million in the
first six months of 2001 from $501.4 million in the first six months of 2000.
During the six months, U.S. footwear wholesale sales of the Reebok Brand were
adversely affected by the decrease in the Company's retail outlet sales which
declined 6.2%. There were no significant changes in the number of retail outlet
stores operated by the Company as compared to the prior year's period. The
Company believes that this decrease was primarily the result of a very
promotional retail climate in the U.S. This decline in the Company's retail
outlet stores was more than offset by the increase in the Company's U.S
wholesale footwear business. U.S. footwear sales in many categories increased.
The basketball category increased 21%, driven by the strong sell-through success
of the Company's Iverson product at retail. The running category increased 22%
and the Classics category increased 13% while the children's and cross-training
categories decreased.
U.S. apparel sales of the Reebok Division (including the sales of the Greg
Norman Collection and NFL licensed product) increased in the first six months by
28.8% to $147.7 million from $114.7 million in the first six months of 2000. The
increase from sales was primarily from sales of NFL licensed product. However,
wholesale sales of Reebok branded apparel increased 6.7% as well. Some new
apparel silhouettes with a strategic focus on women's fitness, Iverson and
Classics have resulted in improving sales trends for Reebok branded apparel. The
Company believes that with the addition of its new sports licensing products,
U.S. apparel will be a growth business over the next several years.
International sales of the Reebok Brand (including footwear and apparel) were
$570.9 million in the first six months of 2001, a decrease of 2.4% from sales of
$585.0 million in the first six months of 2000. However, the decrease is all due
to currency fluctuations. On a constant dollar basis, international sales of the
Reebok Brand increased $27.0 million or 5.0%. In constant dollars, net sales in
Europe increased 6% as compared to the first six months of 2000. During the
first six months of 2001 the Company launched its "Defy Convention" global brand
campaign in Europe and increased its working media spend in the European market.
These initiatives, together with the Company investing in retail presence in
Europe, have helped to drive the sales increase. The Asia Pacific region
reported a constant dollar sales increase of approximately .5% in the six
months. In Latin America, the Company's sales to its independent distributors
increased approximately 20% as these distributors increased their purchases to
meet local consumer demand. International categories that generated sales
increases in the first six months of 2001 were basketball, running, walking, and
classics. International categories that decreased in the first six months of
2001 were men's cross-training and children's. In constant dollars,
international footwear sales increased approximately 7.1%, and international
apparel sales increased by approximately 2.1%. Effective January 1, 2001, the
Company's South Africa subsidiary was sold and became an independent distributor
and the Company purchased a majority interest in its Mexico distributor which
was previously a joint venture. These changes did not have a material impact on
net sales.
Rockport's first six months 2001 sales were $199.0 million an increase of .6%
from sales of $197.8 million in the first six months of 2000. Domestic sales for
the Rockport Brand decreased .5% whereas international sales increased 3.9% as
compared to the first six months of 2000. International revenues accounted for
approximately 26% of Rockport's sales in the first six months of 2001 and 2000.
The Company attributes the domestic sales decline to a weak retail climate in
the U.S. Rockport's new product introductions were successful during the first
six months of 2001. However, core product did slow down during this period.
Sales of the Company's Polo Ralph Lauren Footwear products were $50.8 million in
the first six months of 2001, a decrease of 9.3% from sales of $56.0 million in
the first six months of 2000. The decline is partially attributable to the weak
department store business in the period and partially due to the re-aligning of
the Company's product strategy to conform with that of Polo Ralph Lauren
corporate. During 2001, the Company expects to expand the retail distribution of
its Lauren and Polo Jeans footwear products and to concentrate its design
efforts on developing key items that can become signatures for its various Ralph
Lauren Footwear segments.
The Company entered into a new exclusive licensing agreement with the NFL for
apparel, footwear, equipment and accessories beginning with the 2002 season. In
order to support this new license, in February 2001 the Company purchased
selected assets of LogoAthletic ("Logo"). Included in the assets purchased were
inventory, equipment, facility leases and the rights to Logo's trademarks. The
total purchase price was $14.2 million. Under this new agreement, the NFL
requested that the Company provide services during the transition year of 2001
and the Company has agreed to provide these services. In the first six months of
2001, the Company began shipping Reebok branded NFL licensed products to
retailers. The Company expects 2001 sales of NFL licensed products to be in the
range of $75.0 to $125.0 million.
During the first six months of 2001, the Company's overall gross margin was
37.0% of sales compared to 38.0% for 2000's first six months. The primary
reasons for the decline in the in gross margin first six months is the impact of
the weakening of most foreign currencies against the U.S. dollar and the
promotional nature of the U.S. retail environment. The promotional U.S. retail
environment has resulted in lower maintained margins on closeout products. In
addition, although hide prices for leather have improved recently, margins were
somewhat impacted by increased leather prices in the first six months. The
Company believes that based on current foreign exchange rates and the Company's
hedging strategies, the gross margin percentage for the balance of the year will
approximate that which was achieved in the second quarter of 2001.
Selling, general and administrative expenses for the first six months of 2001
were $451.0 million, or 30.5% of sales, as compared to $469.3 million, or 32.3%
of sales in 2000's first six months. The Company is investing in brand building
initiatives but at the same time it is reducing general and administrative
expenses. As part of its multi-brand strategy to streamline processes and
improve execution, during the second quarter, the Company relocated its Rockport
Brand to its new corporate headquarters and integrated it into its Shared
Services operation. The Company expects to continue to generate greater
operating efficiencies for the balance of 2001, and as a result expects selling,
general and administrative expenses to improve by approximately 150 basis points
as a percentage of sales for the full year as compared to the prior year.
Net interest expense was $8.1 million for the first six months of 2001, a
decrease of $4.8 million as compared to the first six months of 2000. The
decrease was primarily a result of debt repayments and refinancings and the
Company's cash position. Outstanding indebtedness has declined $70.7 million
from June 30, 2000. For the first six months of 2001, other income, net was a
net expense of $5.7 million as compared to net income of $1.8 for the first six
months of 2000. During the first six months of 2001, the Company identified an
underaccrual of buying agent's commissions of approximately $10.6 million
relating to 2001 and prior years. In the opinion of the Company, the amounts
were not material to any of the previously reported quarterly or annual periods.
Accordingly, the $10.6 million has been recorded in the first six months in
other expense. Also included in other expense, is the cost incurred of $6.7
million for the integration and consolidation of the Company's brands into the
Shared Service Center, a gain from the sale of certain real estate assets of
$8.2. Also included in other expenses, are currency losses and the amortization
of intangibles, as well as, the write-off of $5.2 million of unamortized debt
costs associated with the early extinguishment of the Company's term loan.
The effective income tax rate was 31.0% in the first six months of 2001 as
compared to 37.7% in the first six months of 2000. The reduction from the prior
year is the result of the Company's international tax strategy and changes in
the geographic mix of the total Company's earnings. The Company expects that the
annual tax rate will be 31.0%. However, the rate could fluctuate depending on
where the Company earns income geographically, and, if the Company incurs
non-benefitable losses in certain jurisdictions, the rate could increase.
Reebok Brand Backlog of Open Orders
- -----------------------------------
The Reebok Brand backlog (including Greg Norman Collection apparel) of open
customer orders scheduled for delivery during the period July 1, 2001 through
December 31, 2001 increased 12.3% as compared to the same period last year. On a
constant dollar basis, worldwide Reebok Brand backlog increased 17.0%. The 2001
backlog includes NFL licensed product. U.S. backlog for the Reebok Brand,
increased 22.6%. U.S. footwear backlog increased 3.8% and U.S. apparel backlog
(including Greg Norman Collection apparel and the new NFL licensed apparel)
increased 120.5% as compared to the same period last year. In reported dollars
European backlog declined 1.9%, however, in constant dollars the European
backlog increased 7.9%. In constant dollars, European footwear increased 9.2%,
and European apparel increased 6.8%.
Comparisons regarding orders scheduled for delivery for the period July 1
through December 31 are as follows for the Reebok Brand:
Percentage Change
2001/2000
Reported Constant
Dollars Dollars
U.S.A.
Footwear + 3.8% + 3.8%
Apparel* +120.5% +120.5%
Total Domestic + 22.6% + 22.6%
Europe:
Footwear - .7% + 9.2%
Apparel - 2.9% + 6.8%
Total Europe - 1.9% + 7.9%
Total Reebok Brand:
Footwear + 3.8% + 6.8%
Apparel + 29.9% + 39.0%
Total Reebok Brand + 12.3% + 17.0%
o Includes NFL licensed apparel. Excluding this new business U.S. apparel
backlog increased 12.0%
These backlog comparisons are not necessarily indicative of future sales trends.
Many customer orders are cancelable, sales by Company-owned retail outlet stores
are not included in the backlog and can vary from year-to-year, many markets in
Latin America and Asia Pacific are not included in the backlog since sales are
made by independent distributors and the ratio of orders booked early to at-once
shipments can vary from period to period.
Liquidity and Sources of Capital
- --------------------------------
At June 30, 2001, the Company's working capital was $795.9 million as compared
with $636.2 million at June 30, 2000. The current ratio at June 30, 2001 was 2.6
to 1, as compared to 2.5 to 1 at December 31, 2000 and 2.1 to 1 at June 30,
2000. For the twelve months ended June 30, 2001, cash decreased $62.7 million,
as the result of debt payments of approximately $81.3 million. On February 28,
2001 the Company sold $250.0 million of 20-year Convertible Debentures in the
private placement market. The sale was completed with a coupon rate of 4.25%,
payable in cash semi-annually. The Debentures are convertible into shares of
Reebok Common Stock at a price of $38.56. The Company utilized the proceeds to
pay off its outstanding term loan which would have become due during the
remainder of 2001 and 2002. As a result, the Company's next significant
scheduled debt repayment is not until September, 2005.
Inventory increased by $69.4 million or 17.1% from June 30, 2000. The increase
in inventory is to support the growing backlog trends in both the Company's U.S.
and international businesses and is in line with the Company's plans.
Approximately one-third of the increase relates to the new NFL licensing
business. In addition, in order to take advantage of certain currency swings and
hedging contracts the Company took ownership of European inventory slightly
earlier than last year. The Company plans to bring inventories down in relation
to its current comparisons during the remainder of the year. Accounts receivable
increased by $30.8 million from June 30, 2000, an increase of 6.2%. Some of the
increase is in relation to sales trends but some of the increase is due to an
increase in the number of days sales outstanding in accounts receivable which
the Company attributes to the economic slowdown in several countries including
the U.S.
Cash used for operations during the first six months of 2001 was $104.8 million,
as compared to cash provided by operations of $55.0 million during the first six
months of 2000. Cash used for investing activities was $11.9 million as a result
of the Company's $14.2 million purchase of selected assets of LogoAthletic.
Included in the assets purchased were inventory, equipment, facility leases and
the rights to Logo's trademarks. The Company also increased its ownership in one
of its European Distributors and purchased a majority interest in one of its
Latin American Distributors, which had previously been a joint venture. This was
offset by the proceeds of $18.1 million from the sale of certain assets. Capital
expenditures for the six months ended June 30, 2001 were $11.1 million. Cash
generated from operations during the balance of 2001, together with the
Company's existing and available credit lines, other financial resources and
ability to access capital markets given the Company's existing credit ratings,
are expected to adequately finance the Company's current and planned 2001 cash
requirements. However, the Company's actual experience may differ from the
expectations set forth in the preceding sentence. Factors that might lead to a
difference include, but are not limited to, the matters discussed above and
under the caption entitled Issues and Uncertainties included in the Company's
Annual Report on Form 10-K as well as future events that might have the effect
of reducing the Company's available cash balances (such as unexpected operating
losses or increased capital or other expenditures, as well as increases in the
Company's inventory or accounts receivable) or future events that might reduce
or eliminate the availability of external financial resources.
PART II - OTHER INFORMATION
Item 1
None
Item 2
None
Item 3
None
Item 4 Submission of Matters to a Vote of Security-Holders
- ------ ---------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 1, 2001.
At the Annual Meeting:
1. Four Class II members of the Board of Directors were elected by
shareholders with no abstentions or broker non-votes.
Name of Director Votes For Votes Against
Norman Axelrod 51,017,363 4,628,025
Paul R. Duncan 51,017,821 4,627,567
Richard G. Lesser 51,017,506 4,627,882
Deval L. Patrick 51,017,831 4,627,557
The terms of office for Paul B. Fireman, Thomas M. Ryan,
Dorothy E. Puhy, Mannie L. Jackson, and Geoffrey Nunes as
Directors of the Company continued after the Annual Meeting.
2. A proposal to approve the Company's Executive Performance
Incentive Plan was passed by a vote of 44,475,325 For and
1,516,130 Against, with 139,039 Abstentions and 9,514,894
broker non-votes.
3. A proposal to approve the Company's 2001 Equity Incentive and
Director Deferred Compensation Plan was passed by a vote of
25,775,833 For and 21,355,191 Against, with 39,917 Abstentions
and 8,474,447 broker non-votes.
Item 5
None
Item 6
(a) Exhibits
10.58 Common Stock Warrant 1, granted as of May 24, 2001 by the
Company to National Football League Properties, Inc., to
purchase 800,000 shares of the Company's Common Stock at
the purchase price of $27.06 per share.
10.59 Common Stock Warrant 2, granted as of May 24, 2001 by the
Company to National Football League Properties, Inc., to
purchase 800,000 shares of the Company's Common Stock at
the purchase price of $27.06 per share.
10.60 Registration Rights Agreement, dated as of May 24,2001, between the
Company and National Football League Properties, Inc.
(b) Current Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K for the
quarter ended June 30, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 15, 2001
REEBOK INTERNATIONAL LTD.
BY: /s/ KENNETH WATCHMAKER
-------------------------
Kenneth Watchmaker
Executive Vice President and
Chief Financial Officer