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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 March 31, 2000
Commission file number 1-9340
REEBOK INTERNATIONAL LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2678061
- ------------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Technology Center Drive, Stoughton, Massachusetts 02072
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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 May 5, 2000 was 56,683,660 shares.
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REEBOK INTERNATIONAL LTD.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2000 and 1999, and
December 31, 1999 . . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Income - Three
months Ended March 31, 2000 and 1999. . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows -
Three months Ended March 31, 2000 and 1999. . . . . . 6-7
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . 8-10
Item 2
Management's Discussion and Analysis of Results
Of Operations and Financial Condition . . . . . . . . 11-15
Part II. OTHER INFORMATION:
Items 1-5 Not Applicable . . . . . . . . . . . . . . . . . . . . 16
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . 16
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REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
March 31, December 31,
2000 1999 1999
---------- ---------- ----------
(Unaudited) (See Note 1)
Current assets:
Cash and cash equivalents $ 238,449 $ 108,104 $ 281,744
Accounts receivable, net
of allowance for doubtful
accounts (March 2000,
$43,997; March 1999,
$45,646; December 1999,
$46,217) 574,914 611,854 417,404
Inventory 370,267 486,573 414,616
Deferred income taxes 77,455 77,878 88,127
Prepaid expenses and other
current assets 45,042 57,976 41,227
---------- ---------- ----------
Total current assets 1,306,127 1,342,385 1,243,118
---------- ---------- ----------
Property and equipment, net 161,496 176,470 178,111
Other non-current assets:
Intangibles, net of
amortization 71,474 74,662 68,892
Deferred income taxes 46,474 46,782 43,868
Other 23,134 31,611 30,139
---------- ---------- ----------
141,082 153,055 142,899
---------- ---------- ----------
Total Assets $1,608,705 $1,671,910 $1,564,128
========== ========== ==========
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REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Amounts in thousands, except per share data)
March 31, December 31,
2000 1999 1999
----------- ----------- -----------
(Unaudited) (See Note 1)
Current liabilities:
Notes payable to banks $ 23,665 $ 60,696 $ 27,614
Commercial paper 11,274
Current portion of
long-term debt 185,171 91,973 185,167
Accounts payable 148,715 138,579 153,998
Accrued expenses 277,415 231,562 248,822
Income taxes payable 19,829 36,514 8,302
----------- ----------- -----------
Total current liabilities 654,795 570,598 623,903
----------- ----------- -----------
Long-term debt, net of
current portion 360,232 534,556 370,302
Minority interest and other
long-term liabilities 36,501 32,247 41,107
Commitments and contingencies
Stockholders' equity:
Common stock, par value
$.01; authorized 250,000
shares; issued
March 31, 2000, 93,426; issued
March 31, 1999, 92,688;
issued December 31, 1999,
92,986 934 927 930
Retained earnings 1,205,754 1,174,782 1,170,885
Less 36,716 shares
in treasury at cost (617,620) (617,620) (617,620)
Unearned compensation (2,928) (10)
Accumulated other
Comprehensive loss (28,963) (23,570) (25,379)
----------- ----------- -----------
557,177 534,509 528,816
----------- ----------- -----------
Total liabilities and
stockholders' equity $ 1,608,705 $ 1,671,910 $ 1,564,128
=========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)
Three months Ended
March 31,
---------------------------
2000 1999
--------- ---------
Net sales $ 769,829 $ 785,784
Other income, net 4,845 1,168
--------- ---------
774,674 786,952
Costs and expenses:
Cost of sales 478,704 487,766
Selling, general and
administrative expenses 234,519 252,254
Amortization of intangibles 1,120 1,136
Interest expense 10,081 13,996
Interest income (4,306) (1,395)
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720,118 753,757
--------- ---------
Income before income
taxes and minority interest 54,556 33,195
Income tax expense 20,567 11,950
--------- ---------
Income before minority
interest 33,989 21,245
Minority interest 2,277 3,340
--------- ---------
Net income $ 31,712 $ 17,905
========= =========
Basic earnings per share $ .56 $ .32
========= =========
Diluted earnings per share $ .56 $ .32
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three months Ended
March 31,
---------------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 31,712 $ 17,905
Adjustments to reconcile net income
to net cash used for
operating activities:
Depreciation and amortization 10,951 11,490
Minority interest 2,277 3,340
Deferred income taxes 8,142 (3,551)
Net Gain on sale of assets (2,515)
Changes in operating assets and liabilities:
Accounts receivable (160,516) (111,346)
Inventory 36,215 37,407
Prepaid expenses (4,610) (8,501)
Other 1,710 (2,428)
Accounts payable and accrued expenses 15,321 (6,917)
Income taxes payable 10,337 10,220
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Total adjustments (82,688) (70,286)
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Net cash used for operating activities (50,976) (52,381)
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of assets 30,506
Payments to acquire property and
equipment (5,728) (15,775)
Investments in subsidiaries (1,390)
--------- ---------
Net cash provided by (used for)
investing activities 23,388 (15,775)
--------- ---------
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REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Amounts in thousands)
(Unaudited)
Three months Ended
March 31,
---------------------------
2000 1999
--------- ---------
Cash flows from financing activities:
Net borrowings (payments) of notes
payable to banks $ (3,964) $ 43,733
Proceeds from issuance of commercial paper -- 11,274
Payments of long-term debt (9,959) (42,569)
Proceeds from issuance of common stock to
employees -- 133
Dividends to minority shareholders -- (10,224)
Repurchases of common stock -- (16,559)
--------- ---------
Net cash used for financing activities (13,923) (14,212)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (1,784) 10,402
--------- ---------
Net decrease in cash and cash equivalents (43,295) (71,966)
--------- ---------
Cash and cash equivalents at beginning of
period 281,744 180,070
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Cash and cash equivalents at end of period $ 238,449 $ 108,104
========= =========
Supplemental disclosures of cash flow information:
2000 1999
--------- ---------
Cash paid during the period for:
Interest $ 11,480 $ 13,753
Income taxes 775 920
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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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
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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.
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 three months ended March 31,
2000 are not necessarily indicative of results to be expected for the entire
year.
Certain amounts in the prior year have been reclassified to conform to the 2000
presentation.
NOTE 2 - SPECIAL CHARGE
- -----------------------
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, December 31, 1999 $65,557 $21,424 $18,917 $15,534 $ 9,091 $ 591
2000 Utilization 3,782 315 2,786 0 565 116
------- ------- ------- ------- ------- -------
Balance, March 31, 2000 $61,775 $21,109 $16,131 $15,534 $ 8,526 $ 475
======= ======= ======= ======= ======= =======
The fixed asset write-downs relate to assets that will be abandoned or sold. 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.
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NOTE 3 - EARNINGS PER SHARE
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The following table sets forth the computation of basic and diluted earnings per
share (amounts in thousands, except per share data):
Three Months Ended
March 31
---------------------
2000 1999
------- -------
Numerator:
Net income $31,712 $17,905
------- -------
Denominator for basic earnings per share:
Weighted average shares 56,270 56,065
Dilutive employee stock
options 28 476
------- -------
Denominator for diluted earnings per share:
Weighted average shares
and assumed conversions 56,298 56,541
======= =======
Basic earnings per share $ .56 $ .32
Diluted earnings per share $ .56 $ .32
NOTE 4 - COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income for the three months ended March 31, 2000 and March 31,
1999 was $28,128 and $9,984 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.
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NOTE 6 - BUSINESS ACQUISITIONS AND DIVESTITURES
- ----------------------------------------------
During the first quarter of 2000, the Company acquired the remaining minority
interest of certain of its Asia Pacific subsidiaries. The company also sold its
Swiss and Russian subsidiaries to local management and disposed of certain
non-operating assets. The impact of these events was not material to the
consolidated financial statements.
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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.
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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
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First Quarter 2000 Compared to First Quarter 1999
- ---------------------------------------------------
Net sales for the quarter ended March 31, 2000 were $769.8 million, a 2.0%
decrease from 1999's first quarter net sales of $785.8 million. The Reebok
Division's worldwide sales (including the sales of the Greg Norman Collection)
were $641.5 million, a 1.5% decrease from sales of $651.5 million in the first
quarter of 1999. Fluctuation in the Euro is adversely impacting net sales
comparisons. On a constant dollar basis, which eliminates the effect of currency
fluctuations, worldwide sales for the Reebok Division increased approximately
$12.0 million, or 1.9% in the first quarter. U.S. footwear sales of the Reebok
Brand decreased 3.0% to $258.2 million in the first quarter of 2000 from $266.3
million in the first quarter of 1999. Despite the sales decline, U.S. footwear
sales in most categories increased. U.S. apparel sales of the Reebok Division
(including the sales of the Greg Norman Collection) decreased in the first
quarter by 15.4% to $57.7 million from $68.2 million in the first quarter of
1999. Despite the sales decline in the quarter, the Company's apparel profits
increased, as gross margin improved over 1000 basis points and expenses declined
27%. Sales of Greg Norman apparel decreased 11.7% as compared to the first
quarter of 1999, however, gross margins improved by 360 basis points and the
division generated a net profit in the current quarter as compared to a loss
during the first quarter of 1999.
International sales of the Reebok Brand (including footwear and apparel) were
$325.6 million in the first quarter of 2000, an increase of 2.7% from $317.0
million in the first quarter of 1999. On a constant dollar basis, International
sales increased by 8.5% in the first quarter of 2000 as compared to the first
quarter 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
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subsidiaries were sold and became independent distributors. European sales
increased $5.1 million or 2.1%. However, removing the adverse impact of currency
and the effect of the sale of Russia and Switzerland, net sales in Europe
increased approximately 11.0% as compared to the first quarter of 1999. The Asia
Pacific region reported a sales increase of 10.2% in the quarter. In Latin
America, the Company's sales to its independent distributors increased
approximately 88% as these distributors increased their purchases to meet local
consumer demand. International categories that generated sales increases in the
first quarter of 2000 were running, tennis, basketball and cross-training.
International apparel sales decreased approximately 3.0%.
Rockport's first quarter 2000 sales were $101.0 million as compared to sales of
$109.7 million in the first quarter of 1999. Domestic sales for the Rockport
brand decreased by 8.9% and International sales decreased by 7.3%. Domestically,
sales decreased in most categories. In the second half of 2000, the Company
plans to substantially increase the quantity of new product introductions. The
Company's new World Tour shoe collection, which will debut at retail in July,
will be the largest product launch in the history of The Rockport Company.
International revenues accounted for 27.9% of Rockport's sales in the first
quarter of 2000 as compared to 27.7% in the first quarter of 1999.
Sales of the Company's Polo Ralph Lauren Footwear products were $27.3 million in
the first quarter of 2000, an increase of 11.0% from $24.6 million in the first
quarter of 1999.
During the first quarter of 2000, the Company's overall gross margin was 37.8%
of sales, this compares to 37.9% for 1999's first quarter. During the first
quarter of 2000, the impact of improved initial pricing margins, lower markdowns
and fewer closeout sales in the U.S. was offset by margin erosion in Europe
caused by the weakening of the Euro against the U.S. dollar.
Selling, general and administrative expenses for the first quarter of 2000 were
$234.5 million, or 30.5% of sales, as compared to $252.3 million, or 32.1% of
sales in 1999's first quarter. The Company has benefited from programs initiated
in the prior year to reduce general and administrative spending to a lower
percentage of sales. The Company plans to continue to work to reduce non-brand
building expenses and to invest most of these cost savings into increased
marketing and other expenses to support all of the Company's brands.
Net interest expense was $5.8 million for the first quarter of 2000, a decrease
of $6.8 million as compared to the first quarter of 1999. The decrease was a
result of improved cash flow and debt repayment. Other income is the net effect
of foreign exchange losses offset by the gain on sale of certain non-operating
assets.
The effective income tax rate was 37.7% in the first quarter of 2000 as compared
to 36.0% in the first quarter of 1999. Looking forward, dependent on the
geographic mix of earnings in
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2000, the Company expects the first quarter 2000 rate to be indicative of the
full year 2000 rate. However, the rate could fluctuate from quarter to quarter
depending on where the Company earns income geographically, and, if the Company
incurs non-benefitable losses in certain jurisdictions, the rate could increase
further.
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 April 1, 2000 through
September 30, 2000 declined 1.3% as compared to the same period last year. North
American backlog for the Reebok Brand, which includes the U.S. and Canada,
decreased 1.6%, and, the International backlog decreased 1.0%. On a constant
dollar basis, worldwide Reebok Brand backlog increased 1.8%, and International
backlog increased 6.6%. U.S. footwear backlog increased 3.0% and U.S. apparel
backlog (including Greg Norman Collection apparel) decreased 29.4% as compared
to the same period last year. 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 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 March 31, 2000 the Company's working capital was $651.3 million as compared
with $771.8 million at March 31, 1999. The second quarter 1999 reclassification
to a current liability of the $100.0 million medium-term note due in May 2000
resulted in a portion of the working capital reduction. In addition, the Company
repaid $64.7 million of debt during the preceding twelve-month period which
further reduced working capital. The current ratio at March 31, 2000 and
December 31, 1999 was 2.0 to 1 as compared to 2.4 to 1 at March 31, 1999.
Accounts receivable decreased by $36.9 million from March 31, 1999, a decrease
of 6.0%. The decrease is due to an improvement in DSO as well as the sales
decline. Inventory decreased by $116.3 million or 23.9% from March 31, 1999.
This decrease is in line with the Company's plans. In the U.S., the Company's
Reebok Brand footwear inventories were down 47.9%. U.S. Reebok Brand apparel
inventories were down 18.8% and retail inventories were down 3.6% from last
year. Inventories of all brands outside the U.S. decreased 19.9%. The Company
believes that the overall condition of its inventory at wholesale and at retail
has improved from last year, with more of the inventory being current product.
Cash used for operations during the first quarter of 2000 was $50.9 million, as
compared to $52.4 million during the first quarter of 1999. Cash provided by
investing activities was $24.1
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million as a result of the proceeds of $30.5 million from the sale of certain
assets. Capital expenditures for the first quarter of 2000 were $5.7 million, a
decrease from 1999 due to the timing of investments in 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, together with the Company's existing credit lines and other
financial resources, is expected to adequately finance the Company's current and
planned 2000 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 of 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.
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PART II - OTHER INFORMATION
Item 1-5
Not applicable
Item 6
(a) Exhibits:
10.8.1. Second Amended and Restated Credit and Guarantee Agreement, dated as
of March 22, 2000 among the Company, Reebok International Limited,
the Lenders and Co-Agents named therein, Citibank N.A. as
Documentation Agent and Credit Suisse First Boston as Administrative
Agent.
27. Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on form 8-K filed during the quarter ended March 31,
2000.
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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: May 12, 2000
REEBOK INTERNATIONAL LTD.
BY: /s/ KENNETH WATCHMAKER
-------------------------
Kenneth Watchmaker
Executive Vice President and
Chief Financial Officer
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