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 September 30, 2000
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 November 3, 2000 was 57,219,636 shares.
REEBOK INTERNATIONAL LTD.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 2000 and 1999, and
December 31, 1999. . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Income - Three
and Nine months Ended September 30, 2000 and 1999. . . . 5
Condensed Consolidated Statements of Cash Flows - Nine months Ended
September 30, 2000 and 1999. . . . . . . . .. . . . . . . . . 6-7
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . 8-11
Item 2
Management's Discussion and Analysis of Results
Of Operations and Financial Condition. . . . . . . . . . . . 12-19
Part II. OTHER INFORMATION:
Item 1-5 Not Applicable . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6 Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
September 30, December 31,
2000 1999 1999
---- ---- ----
(Unaudited) (See Note 1)
Current assets:
Cash and cash equivalents $ 211,730 $ 143,060 $ 281,744
Accounts receivable, net
of allowance for doubtful
accounts (September 2000,
$49,547; September 1999,
$49,138; December 1999,
$46,217) 522,574 579,859 417,404
Inventory 381,042 449,743 414,616
Deferred income taxes 73,926 79,361 88,127
Prepaid expenses and other
current assets 43,027 52,690 41,227
--------- --------- ---------
Total current assets 1,232,299 1,304,713 1,243,118
--------- --------- ---------
Property and equipment, net 142,867 177,449 178,111
Other non-current assets:
Intangibles, net of
amortization 65,607 71,975 68,892
Deferred income taxes 39,271 51,068 43,868
Other 16,671 28,860 30,139
--------- --------- ---------
121,549 151,903 142,899
--------- --------- ---------
Total Assets $1,496,715 $1,634,065 $1,564,128
========= ========= =========
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Amounts in thousands, except per share data)
September 30, December 31,
2000 1999 1999
---- ---- ----
(Unaudited) (See Note 1)
Current liabilities:
Notes payable to banks $ 6,483 $ 37,571 $ 27,614
Current portion of
long-term debt 95,164 185,186 185,167
Accounts payable 152,529 144,376 153,998
Accrued expenses 307,596 261,771 241,322
Income taxes payable 18,588 25,835 8,302
---------- ---------- ----------
Total current liabilities 580,360 654,739 616,403
---------- ---------- ----------
Long-term debt, net of
current portion 304,472 400,012 370,302
Minority interest and other
long-term liabilities 31,318 33,552 48,607
Commitments and contingencies
Stockholders' equity:
Common stock, par value
$.01; authorized 250,000
shares; issued
September 30, 2000, 95,760;
issued September 30, 1999,
92,826; issued
December 31, 1999, 92,986 958 928 930
Retained earnings 1,279,593 1,184,452 1,170,885
Less shares in treasury
at cost: September 30, 2000,
38,716; September 30, 1999,
36,716; December 31,1999,
36,716 (653,370) (617,620) (617,620)
Unearned compensation (1,651)
Accumulated other
Comprehensive loss (44,965) (21,998) (25,379)
---------- ---------- ----------
580,565 545,762 528,816
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,496,715 $1,634,065 $1,564,128
========== ========== ==========
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 Nine months Ended
September 30, September 30,
---------------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales $ 787,821 $ 793,937 $2,242,726 $2,277,114
Other expense, net (6,621) (4,650) (2,692) (6,222)
------- -------- --------- ---------
781,200 789,287 2,240,034 2,270,892
Costs and expenses:
Cost of sales 488,984 484,677 1,391,302 1,405,035
Selling, general and
administrative expenses 230,703 246,302 700,021 741,913
Special charge 38,000 38,000
Amortization of intangibles 2,027 1,157 4,206 3,892
Interest expense 9,656 11,943 30,677 38,370
Interest income (3,788) (2,181) (11,868) (5,158)
------- -------- --------- ---------
727,582 779,898 2,114,338 2,222,052
------- -------- --------- ---------
Income before income
taxes and minority interest 53,618 9,389 125,696 48,840
Income tax expense 18,203 3,380 45,376 17,582
-------- -------- --------- ---------
Income before minority
interest 35,415 6,009 80,320 31,258
Minority interest 3,091 2,743 5,614 5,519
-------- -------- --------- ---------
Net income $ 32,324 $ 3,266 $ 74,706 $ 25,739
======= ========= ========= =========
Basic earnings per share $ .57 $ .06 $ 1.32 $ .46
======== ========= ========= =========
Diluted earnings per share $ .56 $ .06 $ 1.30 $ .45
======== ========= ========= =========
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)
Nine months Ended
September 30,
----------------
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 74,706 $ 25,739
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 33,234 32,902
Minority interest 5,614 5,519
Deferred income taxes 17,576 (9,108)
Special charge 38,000
Net gain on asset sales and disposals 642
Changes in operating assets and
liabilities:
Accounts receivable (124,691) (71,693)
Inventory 8,909 79,678
Prepaid expenses (3,587) (2,997)
Other 4,253 (1,536)
Accounts payable and accrued expenses 57,617 (9,368)
Income taxes payable 11,956 (1,896)
---------- ----------
Total adjustments 11,523 59,501
---------- ----------
Net cash provided by
operating activities 86,229 85,240
---------- ----------
Cash flows from investing activities:
Proceeds from asset sales 42,438
Payments to acquire property and
equipment (20,276) (36,291)
Investments in subsidiaries (1,890)
---------- ----------
Net cash provided by (used for)
investing activities 20,272 (36,291)
---------- ----------
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Amounts in thousands)
(Unaudited)
Nine months Ended
September 30,
----------------
2000 1999
---- ----
Cash flows from financing activities:
Net borrowings (repayments) of notes
payable to banks $ (19,422) $ (12,265)
Payments of long-term debt (155,059) (54,945)
Proceeds from issuance of common stock to
employees 3,649 1,966
Dividends to minority shareholders (10,224)
Repurchases of common stock (16,559)
-------- --------
Net cash used for financing activities (170,832) (92,027)
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (5,683) 6,068
-------- --------
Net decrease in cash and cash equivalents (70,014) (37,010)
-------- --------
Cash and cash equivalents at beginning of
period 281,744 180,070
-------- ---------
Cash and cash equivalents at end of period $ 211,730 $ 143,060
======== =========
Supplemental disclosures of cash flow information:
2000 1999
---- ----
Cash paid during the period for:
Interest $ 32,166 $ 38,301
Income taxes 15,565 30,966
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
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Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with GAAP for interim financial information and reflect
all adjustments (consisting of only 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 nine months ended September 30,
2000 are not necessarily indicative of results to be expected for the entire
year.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles ("GAAP") for
complete financial statements.
Certain amounts in the prior year have been reclassified to conform to the 2000
presentation.
Recently Issued Accounting Standards
- ------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Statement 133 will require the
Company to record all derivatives on the balance sheet at fair value. For
derivatives that are hedges, changes in the fair value of derivatives will be
offset by changes in the underlying hedged item in earnings in the same period.
In June 1999, the Financial Accounting Standards Board delayed the effective
date of Statement 133 to the first quarter of fiscal years beginning after June
15, 2000. The Company intends to adopt Statement 133 on January 1, 2001.
Management of the Company does not expect the adoption of this standard to have
a material impact on the Company's financial position or results from
operations.
In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", which summarizes the staff's views regarding the application of
generally accepted accounting principles to selected revenue recognition issues.
In June 2000, the SEC issued SAB 101B, which delayed the implementation date of
SAB 101 until no later than the fourth quarter of 2000. The Company believes
that the impact of SAB 101 will not have a material effect on the results of
operations or financial position of the Company.
NOTE 2 - SPECIAL CHARGES
- -----------------------
Details of the special charge activity are as follows:
Termination of
Legal Employee Fixed Asset Marketing Leases and
Total Settlement Severance Write-downs Contracts Other
Balance, 12/31/99 $ 65,557 $ 21,424 $ 18,917 $ 15,534 $ 9,091 $ 591
2000 Utilization (21,112) (1,059) (6,328) (11,385) (1,698) (642)
Change in Estimates 3,289 (3,644) 6,210 723
-------- --------- ---------- --------- --------- ---------
Balance, 9/30/00 $ 47,734 $ 20,365 $ 8,945 $ 10,359 $ 7,393 $ 672
--------- --------- ---------- --------- --------- ---------
The restructuring charge relates to facilities consolidation and elimination,
asset write-downs, personnel related expenses and the termination or
restructuring of certain underperforming marketing contracts that no longer
reflect the Company's brand positioning. During the third quarter of 2000, it
was determined that certain amounts which had previously been provided for in
the restructuring charges totaling $6,260 were no longer required, as the
activity had either been completed or the amount accrued was in excess of
current anticipated requirements. In addition, it was determined that an
additional provision was required for fixed asset impairments totaling $9,549.
The net effect of these changes amounts to a $3,289 charge and is included in
"change in estimates" above. This amount has been reported in other expense in
the accompanying condensed consolidated financial statements for the quarter and
nine months ended September, 2000.
The remaining accruals will be utilized throughout fiscal 2000 and 2001, 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 Nine Months Ended
September 30 September 30
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
Net income $ 32,324 $ 3,266 $ 74,706 $ 25,739
------- ------- ------- -------
Denominator for basic
earnings per share:
Weighted average shares 56,968 56,109 56,729 56,050
Dilutive employee stock
options 1,214 45 756 681
------- ------- ------- -------
Denominator for diluted
earnings per share:
Weighted average shares
and assumed conversions 58,182 56,154 57,485 56,731
======= ======= ======= =======
Basic earnings per share $ .57 $ .06 $ 1.32 $ .46
Diluted earnings per share $ .56 $ .06 $ 1.30 $ .45
NOTE 4 - COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income for the quarter ended September 30, 2000 and September 30,
1999 was $20,264 and $9,815 respectively. Comprehensive income for the nine
months ended September 30, 2000 and September 30, 1999 was $55,121 and $19,390
respectively. Comprehensive income for all periods presented represents net
income and changes in foreign currency translation adjustments.
NOTE 5 - 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.
NOTE 6 - ACQUISITION OF TREASURY STOCK
- --------------------------------------
During the second quarter of 2000, the Company acquired 2,000,000 shares of
treasury stock in a non-cash exchange pursuant to a stock option exercise by a
major shareholder. See the Current Report on Form 8-K filed with the Commission
June 6, 2000.
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: technological, marketing, product, promotional or other success
by one or more of the Company's competitors; changes in consumer preferences;
failure by the Company to adequately forecast consumer demand and sales volume,
leading to increased spending, inventory risk, tooling and other costs;
inability to obtain desired pricing margins and profitability because of
industry conditions, production inefficiencies, increased costs of goods,
currency trends, the general retail environment or the lack of success of the
Company's products or marketing; higher-than-anticipated levels of customer
cancellations or returns; lack of success in the Company's retail operations due
to general retail market conditions or loss of market share to competitors;
failure to meet delivery deadlines because of design, production or distribution
problems; currency fluctuations, government actions, import regulations,
political instability or general economic factors that negatively impact the
Company's business in one or more international regions; interruption or
unavailability of sources of supply; inability to make timely payments on the
Company's indebtedness or to meet debt covenants; loss of one or more
significant customers; inability to protect significant trademarks, patents or
other intellectual property of the Company; negative results in litigation;
general economic factors impacting consumer purchasing power and preferences;
changes in the Company's tax rate or its ability to fully utilize deferred tax
assets; the Company's ability to achieve desired operating and logistical
efficiencies in the areas of distribution and information systems; disruptions
due to Year 2000 non-compliance in the systems of its key suppliers, customers,
distributors or other business partners; 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, 1999 which has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
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
- -----------------
Third Quarter 2000 Compared to Third Quarter 1999
- ---------------------------------------------------
Net sales for the quarter ended September 30, 2000 were $787.8 million, a slight
decrease from 1999's third quarter net sales of $793.9 million. Sales
comparisons are being adversely affected by the weakening of the Euro and
British Pound Sterling over the past several quarters. On a constant dollar
basis, which eliminates the effect of currency fluctuations, net sales for the
quarter ended September 30, 2000 increased $21.5 million or 2.8%. The Reebok
Division's worldwide sales (including the sales of the Greg Norman Collection)
were $645.6 million, a 3.6% increase from constant dollar sales of $623.1
million in the third quarter of 1999.
U.S. footwear sales of the Reebok Brand increased 4.4% to $233.3 million in the
third quarter of 2000 from $223.5 million in the third quarter of 1999.
Consistent with the Company's strategy to focus on certain key strategic
categories, U.S. footwear sales in many categories increased. The basketball
category increased 21% and the men's and women's training categories experienced
double digit growth. Also, consistent with the Company's strategy, the Classics
category increased approximately 3%. The Company believes that its U.S. footwear
business is improving and expects continued growth in 2001.
U.S. apparel sales of the Reebok Division (including the sales of the Greg
Norman Collection) decreased in the third quarter by 15.9% to $58.8 million from
$69.9 million in the third quarter of 1999. Despite the sales decline in the
quarter and current market conditions, the Company's apparel division generated
an operating profit in the quarter by decreasing its operating expenses by
17.3%. The Company is focusing on building a quality apparel business with an
emphasis on men's and women's training. Sales of Greg Norman apparel decreased
24.4% as compared to the third quarter of 1999, however, gross margins improved
by 620 basis points domestically and operating expenses declined 8.8% in the
current quarter as compared to the third quarter of 1999. During 2001, the
Company plans to grow the Greg Norman apparel business by leveraging the success
of PlayDry, its moisture management system, and increasing the number of
department store and green grass golf doors in which the Company does business.
International sales of the Reebok Brand (including footwear and apparel) were
$353.5 million in the third quarter of 2000, an increase of 7.2% from constant
dollar sales of $329.7 million in the third quarter of 1999. International
comparisons were also adversely impacted by the changes to the Company's
international distribution network. Effective January 1, 2000, the Company's
Switzerland and Russia subsidiaries were sold and became independent
distributors. Removing the adverse impact of currency and after giving effect to
the sale of Russia and Switzerland, net sales in Europe increased $2.8 million
or 1.0% as compared to the third quarter of 1999. The Asia Pacific region
reported a sales increase of 25.7% in the quarter. Currency had a positive
impact on these comparisons. On a constant dollar basis, this region reported
double digit sales increases. In Latin America, the Company's sales to its
independent distributors increased approximately 35.5% as these distributors
increased their purchases to meet local consumer demand. International
categories that generated sales increases in the third quarter of 2000 were
basketball, running, tennis, and women's fitness. In constant dollars,
international footwear sales increased approximately 11.5%, whereas
international apparel sales decreased by approximately 2.5%.
Rockport's third quarter 2000 sales were $116.2 million as compared to sales of
$118.3 million in the third quarter of 1999. On a constant dollar basis, third
quarter net sales were flat with the third quarter of 1999. Domestic sales for
the Rockport brand decreased by 4.5%, while International sales increased by
6.3% or 10.9% in constant dollars. As planned, the Company increased the number
of new product introductions beginning in July, 2000 and, as a result, sales of
new men's products increased 20% in the quarter. International revenues
accounted for 27.1% of Rockport's sales in the third quarter of 2000 as compared
to 25.1% in the third quarter of 1999. During the third quarter 2000, Rockport
launched a new lifestyle print ad campaign. Media support for the campaign is
currently planned to increase significantly next year. The Company expects to be
able to grow sales for the Rockport brand in 2001 by revitalizing its core
products and by continuing to introduce new products to the market.
Sales of the Company's Polo Ralph Lauren Footwear products were $26.0 million in
the third quarter of 2000, which is flat with sales of $26.2 million in the
third quarter of 1999. This division is experiencing growth in various key
categories of the business. The Company believes that the Lauren line for women
and Polo Sport Rugged product line for men are generating strong sell-throughs
this season with improved retail presence and an increase in the number of
department store doors. During the quarter, the Company launched Polo Jeans
footwear with limited distribution and experienced strong sell-throughs. During
2001, the Company plans to expand Polo Jeans footwear into additional retail
doors.
During the third quarter of 2000, the Company's overall gross margin was 37.9%
of sales compared to 39.0% for 1999's third quarter. The margin decline was
primarily the result of the margin erosion in Europe caused by the weakening of
the Euro and British Pound Sterling against the U.S. dollar. In order to
mitigate the impact of currency fluctuations on the Company's gross margin in
2001, the Company has implemented selective price increases in various countries
in Europe, value engineered certain products to provide greater efficiencies,
and changed some of its sourcing strategies in order to take advantage of the
strong U.S. dollar.
Selling, general and administrative expenses for the third quarter of 2000 were
$230.7 million, or 29.3% of sales, as compared to $246.3 million, or 31.0% of
sales in 1999's third quarter. The Company continues to review ways to
streamline its operations, achieve greater operating efficiencies and reduce
non-brand building expenses. In 2001, the Company plans to increase its spending
for advertising and marketing working media in order to generate greater
consumer demand throughout 2001. This marketing spend will be funded primarily
from anticipated revenue increases, additional operating efficiencies,
reallocating funds from non-working to working media and from the elimination of
programs which are not critical to the Company's near- term strategic focus.
Net interest expense was $5.9 million for the third quarter of 2000, a decrease
of $3.9 million as compared to the third quarter of 1999. The decrease was a
result of improved cash flow and debt repayments. Other expense, net of $6.6
million relates to currency losses and gains and losses from the sale or
disposal of certain assets primarily related to facilities consolidation and the
change in estimates for restructuring charges (See Note 2).
The effective income tax rate was 33.9% in the third quarter of 2000 as compared
to 36.0% in the third quarter of 1999. The reduction from the year-to-date rate
of 37.7% as of June 30, 2000 is the result of a favorable change in the
geographic mix of the total Company's earnings which the Company believes will
result in an annual rate of 36.1%. Therefore, the nine month tax rate was
adjusted to reflect that estimate. 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 Nine Months 2000 Compared to First Nine Months 1999
- -------------------------------------------------------
Net sales for the first nine months ended September 30, 2000 were $2.243
billion, a 1.5% decrease from 1999's first nine months net sales of $2.277
billion. Sales comparisons are being adversely affected by the weakening of the
Euro and British Pound Sterling over the past several quarters. On a constant
dollar basis, which eliminates the effect of currency fluctuations, net sales
for nine months ended September 30, 2000 increased $19.8 million or
approximately 1.0%. The Reebok Division's worldwide sales (including the sales
of the Greg Norman Collection) were $1.847 billion, a 1.5% increase from
constant dollar sales of $1.819 billion in the first nine months of 1999.
U.S. footwear sales of the Reebok Brand increased slightly to $738.8 million in
the first nine months of 2000 from $734.9 million in the first nine months of
1999. Consistent with the Company's strategy to focus on certain key strategic
categories, U.S. footwear sales in many categories increased. The basketball
category increased 32% and the men's and women's training categories experienced
double digit growth. The Company believes that its U.S. footwear business is
improving and expects continued growth in 2001.
U.S. apparel sales of the Reebok Division (including the sales of the Greg
Norman Collection) decreased in the first nine months by 14.1% to $169.4 million
from $197.3 million in the first nine months of 1999. Despite the sales decline
in the quarter and current market conditions the division generated an operating
profit in the nine months by improving margins 450 basis points and by
decreasing its operating expenses by 21.0%. The Company is focusing on building
a quality apparel business with an emphasis on men's and women's training. Sales
of Greg Norman apparel decreased 15.7% as compared to the first nine months of
1999, however, gross margins improved by 780 basis points and operating expenses
declined 9.7% in the first nine months of 2000 as compared to the first nine
months of 1999.
International sales of the Reebok Brand (including footwear and apparel) were
$938.5 million in the first nine months of 2000, an increase of 5.9% from
constant dollar sales of $886.4 million in the first nine months of 1999.
International comparisons were also adversely impacted by the changes to the
Company's international distribution network. Effective January 1, 2000, the
Company's Switzerland and Russia subsidiaries were sold and became independent
distributors. Removing the adverse impact of currency and after giving effect to
the sale of Russia and Switzerland, net sales in Europe increased $22.1 million
or 3.1% as compared to the first nine months in 1999. The Asia Pacific region
reported a sales increase of 19.5% in the first nine months as compared with the
1999 period. Currency had a positive impact on these comparisons. On a constant
dollar basis, this region reported double digit sales increases. In Latin
America, the Company's sales to its independent distributors increased
approximately 40.2% as these distributors increased their purchases to meet
local consumer demand. International categories that generated sales increases
in the first nine months of 2000 were basketball, running, tennis, and women's
fitness. In constant dollars, international footwear sales increased
approximately 9.6%, whereas international apparel sales decreased by
approximately 1.4%.
Rockport's sales for the first nine months of 2000 were $314.0 million as
compared to sales of $332.0 million in the first nine months of 1999. On a
constant dollar basis, year-to-date net sales decreased 4.9% from 1999. Domestic
sales for the Rockport brand decreased by 7.9%, while international sales
increased by 2.3% or 4.6% in constant dollars. As planned, the Company increased
the number of new product introductions beginning in July, 2000 and, as a
result, sales of new men's products increased 20% in the quarter. International
revenues accounted for 26.2% of Rockport's sales in the first nine months of
2000 as compared to 24.2% in the first nine months of 1999. During the third
quarter 2000, Rockport launched a new lifestyle print ad campaign. Media support
for the campaign is currently planned to increase significantly next year. The
Company expects to be able to grow sales for the Rockport brand in 2001 by
revitalizing its core products and by continuing to introduce new products to
the market.
Sales of the Company's Polo Ralph Lauren Footwear products were $82.0 million in
the first nine months of 2000, an increase of 10.7% from $74.1 million in the
first nine months of 1999. This division is experiencing growth in various key
categories of the business. The Company believes that the Lauren line for women
and Polo Sport Rugged product line for men are generating strong sell-throughs
this season with improved retail presence and an increase in the number of
department store doors. During the quarter, the Company launched Polo Jeans
footwear with limited distribution and experienced strong sell-throughs. During
2001, the Company plans to expand Polo Jeans footwear into additional retail
doors.
During the first nine months of 2000, the Company's overall gross margin was
38.0% of sales compared to 38.3% for 1999's first nine months. The margin
decline was primarily the result of the margin erosion in Europe caused by the
weakening of the Euro and British Pound Sterling against the U.S. dollar. In
order to mitigate the impact of currency fluctuations on the Company's gross
margin in 2001, the Company has implemented selective price increases in various
countries in Europe, value engineered certain products to provide greater
efficiencies, and changed some of its sourcing strategies in order to take
advantage of the strong U.S. dollar.
Selling, general and administrative expenses for the first nine months of 2000
were $700.0 million, or 31.2% of sales, as compared to $741.9 million, or 32.6%
of sales in 1999's first nine months. The Company continues to review ways to
streamline its operations, achieve greater operating efficiencies and reduce
non-brand building expenses. In 2001, the Company plans to increase its spending
for advertising and marketing working media in order to generate greater
consumer demand throughout 2001. This marketing spend will be funded primarily
from anticipated revenue increases, additional operating efficiencies,
reallocating funds from non-working to working media and from the elimination of
programs which are not critical to the Company's near- term strategic focus.
Net interest expense was $18.8 million for the first nine months of 2000, a
decrease of $14.4 million as compared to the first nine months of 1999. The
decrease was a result of improved cash flow and debt repayments. Other expense,
net of $2.7 million relates to currency losses and gains and losses from the
sale or disposal of certain assets primarily related to facilities consolidation
and the change in estimates for restructuring charges (See Note 2).
The effective income tax rate was 36.1% in the first nine months of 2000 as
compared to 36.0% in the first nine months of 1999. The reduction from the
year-to-date rate of 37.7% as of June 30, 2000 is the result of a favorable
change in the geographic mix of the total Company's earnings which the Company
believes will result in an annual rate of 36.1%. Therefore, the nine month tax
rate was adjusted to reflect that estimate. 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 October 1, 2000 through
March 31, 2001 increased 1.1% as compared to the same period last year. U.S.
backlog for the Reebok Brand, increased 6.7%, and, the international backlog
which includes Canada decreased 5.9%. On a constant dollar basis, worldwide
Reebok Brand backlog increased 7.4% and international backlog increased 8.3%.
U.S. footwear backlog increased 7.9%, marking the fifth consecutive quarter of
sequential improvement. U.S. apparel backlog (including Greg Norman Collection
apparel) increased .5% as compared to the same period last year. This is the
first positive backlog position for the U.S. apparel business in three years.
These backlog comparisons are not necessarily indicative of future sales trends.
Many orders are cancelable, sales by Company-owned retail stores can vary from
year to year, many markets in Europe, Latin America and Asia Pacific are not
included in the open orders 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 September 30, 2000, the Company's working capital was $651.9 million as
compared with $650.0 million at September 30, 1999. The current ratio at
September 30, 2000 was 2.1 to 1, as compared to 2.0 to 1 at December 31, 1999
and September 30, 1999. Outstanding bank indebtedness has been reduced by $216.7
million over the last twelve months whereas the Company's cash position as
compared with a year ago has increased by $68.7 million.
Accounts receivable decreased by $57.3 million from September 30, 1999, a
decrease of 9.9%. Inventory decreased by $68.7 million or 15.3% from September
30, 1999. These decreases are in line with the Company's plans. In the U.S., the
Company's Reebok Brand footwear inventories were down 18.8%. U.S. Reebok Brand
apparel inventories increased 9.6% and retail inventories were up 10.2% from
last year. Inventories of all brands outside the U.S. decreased 30.2%.
Cash provided by operations during the first nine months of 2000 was $86.1
million, as compared to $85.2 million the first nine months of 1999. Cash
provided by investing activities was $20.3 million as a result of the proceeds
of $42.4 million from the sale of certain assets. Capital expenditures for the
nine months ended September 30, 2000 were $20.3 million, a decrease from 1999
due to higher investments in 1999 for the Company's European Logistics and
Shared Service Companies, international retail expansion and other information
systems initiatives. Cash generated from operations during the balance of 2000
and 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 - 5
Not Applicable
Item 6
(a) Exhibits
27. Financial Data Schedule
(b) Current Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K for the
quarter ended September 30, 2000.
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: November 13, 2000
REEBOK INTERNATIONAL LTD.
BY: /s/ KENNETH WATCHMAKER
-------------------------
Kenneth Watchmaker
Executive Vice President and
Chief Financial Officer