-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U67lHvboZAOpLKXSAsfl/p5mLPpCTHYkyAc1ZC261rXWPQBTD2j6/IB75qqJFJiT g+OxHa3idvotoq5cKwTaqw== 0000770949-98-000013.txt : 19980813 0000770949-98-000013.hdr.sgml : 19980813 ACCESSION NUMBER: 0000770949-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REEBOK INTERNATIONAL LTD CENTRAL INDEX KEY: 0000770949 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 042678061 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09340 FILM NUMBER: 98683589 BUSINESS ADDRESS: STREET 1: 100 TECHNOLOGY CTR DR CITY: STOUGHTON STATE: MA ZIP: 02072 BUSINESS PHONE: 6173415000 10-Q 1 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, 1998 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 _________________________________________________________________ (Address of principal executive offices) (Zip Code) (781) 401-5000 _________________________________________________________________ (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 7, 1998, was 56,444,700 shares. REEBOK INTERNATIONAL LTD. INDEX PART I. FINANCIAL INFORMATION: Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 1998 and 1997, and December 31, 1997 . . . . . . . . 3-4 Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 1998 and 1997 . . 5 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 . . . . 6-7 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 8-11 Item 2 Management's Discussion and Analysis of Results Of Operations and Financial Condition . . . . 12-17 Part II. OTHER INFORMATION: Items 1-5 Not Applicable . . . . . . . . . . . . . . . . . 18 Item 6 Exhibits and Reports on Form 8-K . . . . . . . . 18 2 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
June 30, December 31, 1998 1997 1997 ____ ____ ____ (Unaudited) (See Note 1) Current assets: Cash and cash equivalents $ 143,924 $ 122,307 $ 209,766 Accounts receivable, net of allowance for doubtful accounts (June 1998, $48,014; June 1997, $48,271; December 1997, $44,003) 543,580 656,832 561,729 Inventory 596,600 580,933 563,735 Deferred income taxes 81,375 71,677 75,186 Prepaid expenses and other current assets 57,715 39,068 54,404 _________ _________ ________ Total current assets 1,423,194 1,470,817 1,464,820 _________ _________ _________ Property and equipment, net 156,960 182,796 156,959 Non-current assets: Intangibles, net of amortization 63,245 67,538 65,784 Deferred income taxes 21,698 9,558 19,371 Other 46,565 54,669 49,163 _________ _________ _________ 131,508 131,765 134,318 _________ _________ _________ Total Assets $1,711,662 $1,785,378 $1,756,097 ========= ========= =========
3 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Amounts in thousands)
June 30, December 31, 1998 1997 1997 ____ ____ ____ (Unaudited) (See Note 1) Current liabilities: Notes payable to banks $ 62,218 $ 61,196 $ 40,665 Current portion of long-term debt 105,920 66,307 121,000 Accounts payable 174,609 190,653 192,142 Accrued expenses 202,845 200,323 219,386 Income taxes payable 20,637 60,309 4,260 __________ __________ __________ Total current liabilities 566,229 578,788 577,453 __________ __________ __________ Long-term debt, net of current portion 607,822 731,955 639,355 Minority interest 27,185 36,273 32,132 Commitments and contingencies Outstanding redemption value of equity put options 16,559 Stockholders' equity: Common stock, par value $.01; authorized 250,000 shares; issued June 30, 1998, 93,159; issued June 30, 1997, 92,935; issued December 31,1997, 93,116 932 929 931 Additional paid-in capital Retained earnings 1,133,769 1,062,970 1,145,271 Less 36,716 shares in treasury at cost (617,620) (617,620) (617,620) Unearned compensation (56) (208) (140) Foreign currency translation adjustment (23,158) (7,709) (21,285) __________ __________ __________ 493,867 438,362 507,157 __________ __________ __________ Total liabilities and stockholders' equity $1,711,662 $1,785,378 $1,756,097 ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 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, ____________________ _________________ 1998 1997 1998 1997 ____ ____ ____ ____ Net sales $ 760,567 $ 841,059 $1,640,690 $1,771,100 Other income (expense) (5,393) (783) (5,586) 313 _________ _________ __________ __________ 755,174 840,276 1,635,104 1,771,413 Costs and expenses: Cost of sales 480,239 517,548 1,046,311 1,091,360 Selling, general and administrative expenses 253,428 274,715 518,873 546,397 Special charge 35,000 Amortization of intangibles 776 860 1,743 1,620 Interest expense 16,616 16,305 34,225 32,218 Interest income (3,376) (2,503) (8,225) (4,492) _________ _________ __________ __________ 747,683 806,925 1,627,927 1,667,103 _________ _________ __________ __________ Income before income taxes and minority interest 7,491 33,351 7,177 104,310 Income tax expense 2,411 12,000 2,311 37,700 _________ _________ __________ __________ Income before minority interest 5,080 21,351 4,866 66,610 Minority interest (1,066) 1,029 2,078 6,104 _________ _________ __________ __________ Net income $ 6,146 $ 20,322 $ 2,788 $ 60,506 ========= ========= ========== ========== Basic earnings per share $ .11 $ .36 $ .05 $ 1.08 ========= ========= ========== ========== Diluted earnings per share $ .11 $ .35 $ .05 $ 1.04 ========= ========= ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Six Months Ended June 30, ________________ 1998 1997 ____ ____ Cash flows from operating activities: Net income $ 2,788 $ 60,506 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 24,760 22,704 Minority interest 2,078 6,104 Deferred income taxes (12,123) (3,963) Special charge 35,000 Changes in operating assets and liabilities: Accounts receivable 13,325 (81,056) Inventory (42,462) (47,838) Prepaid expenses (3,555) (13,009) Other 17,232 13,185 Accounts payable (13,832) (98) Accrued expenses (52,694) 30,959 Income taxes payable 15,594 (5,409) __________ __________ Total adjustments (16,677) (78,421) __________ __________ Net cash used by operating activities (13,889) (17,915) __________ __________ Cash flows from investing activity: Payments to acquire property and equipment (20,128) (17,574) __________ __________ Net cash used by investing activity (20,128) (17,574) __________ __________ 6 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd) (Amounts in thousands) (Unaudited)
Six Months Ended June 30, ________________ 1998 1997 ____ ____ Cash flows from financing activities: Net borrowings of notes payable to banks $ 23,135 $ 28,746 Payments of long-term debt (46,693) (108,320) Proceeds from issuance of common stock to employees 1,295 9,902 Proceeds from premium on equity put options 2,002 Dividends to minority shareholders (6,649) (1,600) Repurchases of common stock (3,181) ________ ________ Net cash used for financing activities (30,091) (71,272) ________ ________ Effect of exchange rate changes on cash and cash equivalents (1,734) (3,297) ________ ________ Net decrease in cash and cash equivalents (65,842) (110,058) ________ ________ Cash and cash equivalents at beginning of period 209,766 232,365 ________ _________ Cash and cash equivalents at end of period $ 143,924 $ 122,307 ======== ========= Supplemental disclosures of cash flow information: 1998 1997 ____ ____ Cash paid during the period for: Interest $ 23,835 $ 34,708 Income taxes 9,600 30,813 The accompanying notes are an integral part of the condensed consolidated financial statements. 7 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ___________________________________________________ Basis of Presentation _____________________ The balance sheet at December 31, 1997 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 for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals, as well as special charges) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period. 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 six months ended June 30, 1998 are not necessarily indicative of results to be expected for the entire year. Recently Issued Accounting Standards ____________________________________ During 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("Statement 130"). The Company will adopt the provisions of Statement 130 for fiscal year end 1998. Comprehensive income is generally defined as all changes in stockholders' equity exclusive of transactions with owners such as capital investments and dividends. Comprehensive income for the quarters ended June 30, 1998 and June 30, 1997 was $5,414 and $21,001 respectively. Comprehensive income for the six months ended June 30, 1998 and 1997 was $915 and $47,149, respectively. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("Statement 131"). The Company will adopt the provisions of Statement 131 for fiscal year end 1998. 8 NOTE 2 - SPECIAL CHARGE _______________________ In the first quarter of 1998, the Company recorded a special charge of $35,000, amounting to approximately $23,700 after taxes, or $0.42 per share in connection with the Company's ongoing business re- engineering efforts. The charge was for personnel related expenses and certain other expenses associated with the restructuring or adjustment of underperforming marketing contracts. The business re- engineering, which will result in the termination of approximately 485 full-time positions, should enable the Company to achieve greater operating efficiencies by reducing management layers, combining business units and centralizing various business functions. The underperforming marketing contracts are being terminated or restructured to focus the Company's spending on those key athletes and teams who are more closely aligned with its brand positioning. The charge covers certain one-time expenses, substantially all of which will affect cash. The components of the first quarter 1998 charge are presented below with additional information concerning the activities affecting the reserve for special charges:
Balance Q1 98 Six Months Balance 12/31/97 Additions Payments/ 6/30/98 Utilization ________ _________ ___________ _______ Marketing contracts $ 25.0 M $ 18.5 M $(14.1) M $ 29.4 M Fixed asset write-downs 6.9 (.2) 6.7 Employee severance 8.4 14.8 (8.4) 14.8 Termination of leases 5.8 5.8 Other 1.0 1.7 (1.7) 1.0 ______ _______ ________ _______ $ 47.1 M $ 35.0 M $(24.4) M $ 57.7 M ======== ========= ========= ========
9 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 ___________________ _________________ 1998 1997 1998 1997 ____ ____ ____ ____ Numerator: Net income $ 6,146 $ 20,322 $ 2,788 $ 60,506 _______ _______ _______ _______ Denominator for basic earnings per share: Weighted average shares 56,338 56,140 56,341 56,044 Dilutive employee stock options 817 2,010 816 2,270 _______ _______ _______ _______ Denominator for diluted earnings per share: Weighted average shares and assumed conversions 57,155 58,150 57,157 58,314 ======= ======= ======= ======= Basic earnings per share $ .11 $ .36 $ .05 $ 1.08 Diluted earnings per share $ .11 $ .35 $ .05 $ 1.04
NOTE 4 - 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. Included in these proceedings is a lawsuit filed by a former distributor in Brazil in which the plaintiff has asserted a claim for damages in excess of $50,000. In April 1998, a court of first instance in Brazil awarded this distributor damages of approximately $15,000. The Company is appealing this ruling, which it believes to be in error. The appeal will be heard on a de novo basis which means that the appeals court will make its own factual determinations and 10 not be bound by the lower court's decisions. The Company believes that no material liability will result from this matter once it is concluded and, accordingly, no liability has been recorded in connection with the claim in the accompanying condensed consolidated financial statements. NOTE 5 - EQUITY PUT OPTIONS ___________________________ From time to time the Company issues equity put options as part of its ongoing share repurchase programs. The redemption value of the options, which represents the option price multiplied by the number of shares under option, is presented in the accompanying condensed consolidated balance sheet as "Outstanding redemption value of equity put options." At June 30, 1998, 625 shares of outstanding common stock are subject to repurchase at prices ranging from $26.173 to $26.975 under the terms and conditions of these options. The outstanding options expire in January 1999. 11 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results may 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. Factors 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, those discussed below and those described in Exhibit 99 - Issues and Uncertainties filed with this quarterly report on Form 10-Q. Operating Results _________________ Second Quarter 1998 Compared to Second Quarter 1997 ___________________________________________________ Net sales for the quarter ended June 30, 1998 were $760.6 million, a decrease of 9.6% from 1997's second quarter net sales of $841.0 million. The Reebok Division's worldwide sales (which includes sales of the Greg Norman Division) were $634.3 million, a 12.2% decrease from sales of $722.5 million in the second quarter of 1997. Approximately 2% of the decline in the Reebok Division's worldwide sales is due to currency fluctuations, primarily as a result of the strength of the U.S. dollar and the devaluation of certain Asian currencies. Reebok Brand's U.S. footwear sales decreased 12.8% to $268.9 million in the second quarter of 1998 from $308.5 million in the second quarter of 1997. U.S. footwear sales of the Reebok Brand continued to be adversely affected by abnormally high rates of cancellations and returns partially due to generally poor industry conditions at retail. Cancellations and returns of this segment increased by approximately $20.0 million over last year's second quarter level. This increase includes the effect of the Company cancelling or recalling approximately 160,000 pair of DMX running shoes to inspect the product for a possible stitching defect. This recall adversely affected sales in the quarter by approximately $9.0 million. U.S. footwear categories that generated sales increases in the second quarter of 1998 were running, which has been a key focus of the Company due to the introduction of its new technology products, women's fitness, outdoor and children's; whereas all other categories reported decreases. U.S. apparel sales decreased in the second quarter by 9.3% to $79.8 million from $88.0 million in the second quarter of 12 1997. Increased sales of apparel in the Company's retail outlet stores and its Greg Norman Division were more than offset by declines in Reebok branded and licensed apparel. International sales of the Reebok Division (including footwear and apparel) were $285.6 million in the second quarter of 1998, a decrease of 12.4% from $326.0 million in the second quarter of 1997. The sales decline was partially attributed to fluctuations in foreign currency exchange rates and partially due to the deterioration of economic conditions in Japan, Korea, Brazil and Argentina. Sales during the second quarter of 1998 were down approximately 47% in Asia Pacific and 41% in Latin America when compared to the second quarter of 1997. On a constant dollar basis for the quarter, the Reebok Division's International sales decreased 7.6% with sales of footwear declining, and apparel sales increasing slightly. The European region reported sales increases whereas Asia Pacific and Latin America reported declines in sales. Most of the Reebok Division's International footwear categories declined during the quarter, however, the classics and children's categories had sales increases. During the second quarter of 1998, apparel sales accounted for 38.0% of Reebok's International Division's sales, as compared with 35.4% of sales in the second quarter of 1997. Rockport's second quarter sales increased by 6.6% to $126.3 million from $118.5 million in the second quarter of 1997. Rockport Brand's domestic sales increased by 6.5% while International sales decreased by 18.7%. Rockport Brand's International sales were negatively impacted by the adverse economic factors in Asia Pacific and Latin America, where sales declined approximately 56.0% and 30.0% respectively, from the second quarter of 1997. Some of this international decline is the result of inventory reductions by independent distributors. Rockport Brand's sales increased in the men's category, whereas the women's lifestyle category declined 30.7%. The Ralph Lauren Footwear Division, which is included in Rockport's reported sales, had a sales increase of 19.7% in the second quarter of 1998, with all of the increase coming from the Polo Sport segment. For the second quarter, the overall gross margin was 36.9% of sales which is an improvement from the first quarter rate of 35.7%, but down from last year's second quarter gross margin of 38.5%. U.S. Reebok Brand's footwear pricing margins improved from the first quarter. This improvement is the result of manufacturing efficiencies the Company is achieving with technology products and from sourcing changes initiated to take advantage of currency opportunities in the Far East. Much of the improvement was offset by a greater percentage of the Company's business being off-price due to the promotional activity in the market. International margins continue to be adversely affected by the strong U.S. dollar. Selling, general and administrative expenses for the second quarter of 1998 were $253.4 million, or 33.3% of sales, as compared to $274.7 million, or 32.7% of sales in 1997's second quarter. During 13 the second quarter of 1998, the Company began to benefit from the various cost reduction programs initiated last year which had the overall effect of reducing the Company's total selling, general and administrative spending from last year's level. The Company continues to invest in the growth segments of the business including the Rockport, Polo/Ralph Lauren, Greg Norman and Retail Divisions. In addition, in the second quarter of 1998 the Company incurred start-up expenses for its European logistics and shared service companies as well as its global information system re-engineering efforts. These start-up expenses, which are mostly redundant in nature, amounted to approximately $13.0 million for the second quarter and are expected to aggregate approximately $35-$45 million for the full year. For the second quarter of 1998, exclusive of start-up expenses, general and administrative type expenses declined 14.4%. Net interest expense decreased for the second quarter of 1998 as compared to the second quarter of 1997 as a result of debt repayments. Other expense was $5.4 million for the quarter, an increase of over $4.0 million from last year second quarter. Most of the increase is due to foreign exchange losses on various unhedged positions. The effective income tax rate was approximately 32% in the second quarter of 1998 as compared to 36% in the second quarter of 1997 and 33% for the full year 1997 (exclusive of certain one-time tax benefits received in 1997). Looking forward, dependent on the geographic mix of earnings in 1998, the Company expects the second quarter 1998 rate to be indicative of the full year 1998 rate. First Six Months 1998 Compared to First Six Months 1997 _______________________________________________________ Net sales for the six month period ended June 30, 1998 were $1.641 billion, a decrease of 7.4% from 1997's net sales of $1.771 billion. The Reebok Division's worldwide sales (which includes sales of the Greg Norman Division) were $1.385 billion, a 9.7% decrease from sales of $1.534 billion in 1997. Approximately 2.3% of the decline in the Reebok Division's worldwide sales is due to currency fluctuations, primarily as a result of the strength of the U.S. dollar and the devaluation of certain Asian currencies. Reebok Brand's U.S. footwear sales decreased 12.5% to $562.6 million in the first six months of 1998 from $643.2 million in the 1997 period. U.S. footwear sales of the Reebok Brand continued to be adversely affected by abnormally high rates of cancellations and returns partially due to generally poor industry conditions at retail. Cancellations and returns of this segment increased by approximately $55.0 million as compared to the same period last year. U.S. footwear categories that generated sales increases in the first six month period of 1998 were running, which has been a key focus of the Company due to the introduction of its new technology products, women's fitness, outdoor and children's; whereas all other categories reported decreases. U.S. apparel sales decreased in the first six months by 5.0% to $176.6 million from $185.9 million 14 in 1997. Increased sales of apparel in the Company's retail outlet stores and its Greg Norman Division were more than offset by declines in Reebok branded and licensed apparel. International sales of the Reebok Division (including footwear and apparel) were $645.6 million in the first six months of 1998, a decrease of 8.4% from $705.1 million in the first six months of 1997. The sales decline was partially attributed to fluctuations in foreign currency exchange rates and partially due to the deterioration of economic conditions in Japan, Korea, Brazil and Argentina. Sales during the first six months of 1998 were down approximately 36% in Asia Pacific and 33% in Latin America when compared to the first six months of 1997. On a constant dollar basis for the six month period, the Reebok Division's International sales decreased 2.7% with sales of footwear declining, and apparel sales increasing slightly. The European region reported sales increases whereas Asia Pacific and Latin America reported declines in sales. Most of the Reebok Division's International footwear categories declined during the six month period, however, the classics and children's categories had sales increases. During the first six months of 1998, apparel sales accounted for approximately 37.1% of Reebok's International Division's sales, as compared with 35.1% of sales in the first six months of 1997. Rockport's sales for the first six months increased by 8.0% to $255.9 million from $236.9 million in the first six months of 1997. Rockport Brand's domestic sales increased by 4.3% while International sales decreased by 2.7%. Rockport Brand's International sales were negatively impacted by the adverse economic factors in Asia Pacific, where sales declined approximately 35.0% from the first six months of 1997. Rockport Brand's sales increased in the men's category whereas the women's lifestyle category declined 20.8%. The Ralph Lauren Footwear Division, which is included in Rockport's reported sales, had a sales increase of 21.5% in the first six months of 1998, with all of the increase coming from the Polo Sport segment. For the first six months of 1998, the overall gross margin was 36.2% of sales which is down from last year's rate of 38.4% but an improvement when compared to the last six months of 1997, when the rate was 35.8%. U.S. Reebok Brand's footwear pricing margins for the first six months of 1998 were unfavorable when compared to the same period in 1997, but showed improvement when compared to the last six months of 1997. The improving trend in pricing margins is the result of manufacturing efficiencies the Company is achieving with technology products and from sourcing changes initiated to take advantage of currency opportunities in the Far East. Much of the improvement was offset by a greater percentage of the Company's business being off- price due to the promotional activity in the market. International margins continue to be adversely affected by the strong U.S. dollar. Selling, general and administrative expenses for the first six months of 1998 were $518.9 million, or 31.6% of sales, as compared to 15 $546.4 million, or 30.9% of sales in the first six months of 1997. During the first six months of 1998, the Company began to benefit from the various cost reduction programs initiated last year which had the overall effect of reducing the Company's total selling, general and administrative spending from last year's level. The Company continues to invest in the growth segments of the business including the Rockport, Polo/Ralph Lauren, Greg Norman and Retail Divisions. In addition, in the first six months of 1998 the Company incurred start- up expenses for its European logistics and shared service companies as well as its global information system re-engineering efforts. These start-up expenses, which are mostly redundant in nature, amounted to approximately $18.0 million for the six months and are expected to aggregate approximately $35-$45 million for the full year. For the first six months of 1998, exclusive of start-up expenses, general and administrative type expenses declined 8.7%. Net interest expense decreased for the first six months of 1998 as compared to the first six months of 1997 as a result of debt repayments. Other expense was $5.6 million for the first six months, an increase of over $5.0 million from last year's first six months. Most of the increase is due to foreign exchange losses on various unhedged positions. The effective income tax rate was approximately 32% for the first six months of 1998 as compared to 36% in the first six months of 1997 and 33% for the full year 1997 (exclusive of certain one-time tax benefits received in 1997). Looking forward, dependent on the geographic mix of earnings in 1998, the Company expects that the full year 1998 rate will approximate the rate during the first six month period. Reebok Brand Backlog of Open Orders ___________________________________ The Reebok Brand backlog of open customer orders for the period July 1 through December 31, 1998 decreased 17.1% as compared to the same period last year. North American backlog, which includes the U.S. and Canada, decreased 22.1% and the International backlog decreased 7.2%. On a constant dollar basis, the International backlog decreased 3.1%. U.S. footwear backlog decreased 20.9% and U.S. apparel backlog decreased 26.8% as compared to the same period last year. U.S. backlog comparisons are against a period last year which was just prior to the industry slowdown in the back-to-school period at retail. The retail slowdown has resulted in higher retail cancellations and returns during 1998. In addition, the Company believes retailers are being more conservative leaving more open-to-buy dollars available for at-once business. This situation, in combination with the unusually low at-once business in 1997's second half, suggests that these percentage decreases in open backlog in the U.S. are not necessarily indicative of future sales trends. In addition, many orders are cancelable, sales by company-owned retail stores can vary from year to year, many markets in South America and Asia Pacific are not included 16 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 ________________________________ The Company's financial position remains strong. Working capital was $857.0 million at June 30, 1998 and $892.0 million at June 30, 1997. The current ratio at June 30, 1998 and 1997 and December 31, 1997 was 2.5 to 1. Accounts receivable decreased from June 30, 1997 by $113.3 million, a decrease of 17.2%. The decrease is partially due to the sales decline and partially due to improved cash collections in the U.S. as compared to the first six months of 1997. Inventory increased $15.7 million or 2.7% from June 30, 1997. The increase is due to improved on-time deliveries from the factories and a higher rate of cancellations and returns in the U.S. The Company has adjusted footwear purchases for the balance of 1998 to be in line with current sales trends. Cash used for operations during the first six months of 1998 was $13.9 million, as compared to cash used for operations of $17.9 million during the first six months of 1997. Cash generated from operations during the balance of 1998, together with the Company's existing credit lines and other financial resources, is expected to adequately finance the Company's current and planned 1998 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 in Exhibit 99 - Issues and Uncertainties filed herewith, 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. 17 PART II - OTHER INFORMATION Item 1 - 5 Not applicable Item 6 (a) Exhibits: 27. Financial Data Schedule 99. Issues and Uncertainties (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended June 30, 1998. 18 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 12, 1998 REEBOK INTERNATIONAL LTD. BY: /s/ KENNETH WATCHMAKER _________________________ Kenneth Watchmaker Executive Vice President and Chief Financial Officer 19 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1998 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 143,924 0 591,594 48,014 596,660 1,423,194 369,603 212,643 1,711,662 566,229 635,007 0 0 932 492,935 1,711,662 1,640,690 1,635,104 1,046,311 1,046,311 557,694 0 26,000 5,099 2,311 2,788 0 0 0 2,788 .05 .05
EX-99 3 EXHIBIT 99 ISSUES AND UNCERTAINTIES ________________________ The Company's Quarterly report on Form 10-Q filed herewith includes, and other documents, information or statements released or made from time to time by the Company may include, forward-looking statements. These statements involve risks and uncertainties. The Company's actual results may 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. The following discussion identifies certain important issues and uncertainties that are among the factors 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. Competition and Consumer Preferences ____________________________________ The footwear and apparel industry is intensely competitive and subject to rapid changes in consumer preferences, as well as technological innovations. A major technological breakthrough or marketing or promotional success by one of the Company's competitors could adversely affect the Company's competitive position. A shift in consumer preferences could also negatively impact the Company's sales and financial results. Currently, the industry is experiencing some shift in consumer preference away from athletic footwear to "brown shoe" or "casual" product offerings. This change in preference has adversely affected the Company's business, as well as that of some of its competitors. The Company is taking steps to respond to this shift by focusing on its products and technologies and pursuing growth opportunities with its Rockport, Ralph Lauren Footwear and Greg Norman brands. There is, however, substantial uncertainty as to whether the Company's actions will be effective and how significant the adverse impact of the shift in consumer preference will be on the Company's business. The outcome will be dependent on a number of factors, including the extent of the change in consumer preference, consumer and retailer acceptance of the Company's products, technologies and marketing, and the ability of the Company to effectively respond to the shift in the marketplace, as well as the other factors described in this Section. In addition, in countries where the athletic footwear market is mature (including the U.S.), sales growth may be dependent in part on the Company increasing its market share at the expense of its competitors, which may be difficult to accomplish. The Company also faces strong competition with respect to its other product lines, such as the ROCKPORT product line and the GREG NORMAN collection. Competition in the markets for the Company's products occurs in a variety of ways, including price, quality, product design, brand image, marketing and promotion and ability to meet delivery commitments to retailers. The intensity of the competition faced by the various operating units of the Company and the rapid changes in the consumer preference and technology that can occur in the footwear and apparel markets constitute significant risk factors in the Company's operations. Inventory Risk ______________ The footwear industry has relatively long lead times for design and production of product and thus, the Company must commit to production tooling and in some cases to production in advance of orders. If the Company fails to accurately forecast consumer demand or if there are changes in consumer preference or market demand after the Company has made such production commitments, the Company may encounter difficulty in filling customer orders or in liquidating excess inventory, or may find that retailers are canceling orders or returning product, all of which may have an adverse effect on the Company's sales, its margins and brand image. In addition, the Company may be required to pay for certain tooling if it does not satisfy minimum production quantities. Sales Forecasts _______________ The Company's investment in advertising and marketing is based on sales forecasts and is necessarily made in advance of actual sales. The markets in which the Company does business are highly competitive, and the Company's business is affected by a variety of factors, including brand awareness, changing consumer preferences, fashion trends, retail market conditions, currency changes and economic and other factors. There can be no assurance that sales forecasts will be achieved, and to the extent sales forecasts are not achieved, these investments will represent a higher percentage of revenues, and the Company will experience higher inventory levels and associated carrying costs, all of which would adversely impact the Company's financial condition and results. See also discussion below under "Advertising and Marketing Investment." Pricing and Margins ___________________ The prices that the Company is able to charge for its products are dependent on the type of product offered and the consumer and retailer response to such product, as well as the prices charged by the Company's competitors. If, for example, the Company's products provide enhanced performance capabilities, the Company should be able to achieve relatively higher prices for such products. The gross margins which the Company earns are dependent on the prices which the Company can charge for these goods and the costs incurred in acquiring the products for sale. To the extent that the Company has higher costs, such as the higher startup costs associated with technological products, its margins will be lower unless it can increase its prices. The Company has recently experienced declining margins partially as a result of the higher cost associated with its new technology products and its inability to increase its sale prices sufficiently to cover such costs. In order for the Company to increase its margins, it will need to either reduce its costs, for example, by achieving production efficiencies or economies of scale, or increase its selling price. There can be no assurance that either of such results can be achieved. In addition, because of the shift in the marketplace and the resulting over-inventoried promotional retail environment, the Company's full-margin at once business has decreased and the Company has encountered increased returns and cancellations from retailers, resulting in declining margins. The ability of the Company to increase its full margin business is dependent on a number of factors including the success of the Company's products and marketing, the retail environment and general industry conditions. Advertising and Marketing Investment ____________________________________ Because consumer demand for athletic footwear and apparel is heavily influenced by brand image, the Company's business requires substantial investments in marketing and advertising, including television and other advertising, athlete endorsements and athletic sponsorships, as well as investments in retail presence. In the event that such investments do not achieve the desired effect in terms of increased retailer acceptance and/or consumer purchase of the Company's products, there could be an adverse impact on the Company's financial results. Recently, there has been some shift in the marketplace away from certain "icon" athletes and the products they endorse. As a result, the Company has re-evaluated its investment in certain sports marketing deals and is in the process of eliminating or restructuring certain of its marketing contracts that no longer reflect Reebok's brand positioning. Retail Operations _________________ The Company currently operates approximately 150 retail stores in the U.S. and a significant number of retail stores internationally which are operated either directly or through the Company's distributors. The Company has made a significant capital investment in opening these stores and incurs significant expenditures in operating these stores. To the extent the Company continues to expand its retail organization, the Company's performance could be adversely affected by lower than anticipated sales at its retail stores. The performance of the Company's retail organization is also subject to general retail market conditions. Timeliness of Product _____________________ Timely product deliveries are essential in the footwear and apparel business since the Company's orders are cancelable by customers if agreed delivery windows are not met. If as a result of design, production or distribution problems, the Company is late in delivering product, it could have an adverse impact on its sales and/or profitability. International Sales and Production __________________________________ A substantial portion of the Company's products are manufactured abroad and approximately 40% of the Company's sales are made outside the U.S. The Company's footwear and apparel production and sales operations are thus subject to the usual risks of doing business abroad, such as currency fluctuations, longer payment terms, potentially adverse tax consequences, repatriation of earnings, import duties, tariffs, quotas and other threats to free trade, labor unrest, political instability and other problems linked to local production conditions and the difficulty of managing multinational operations. If such factors limited or prevented the Company from selling products in any significant international market or prevented the Company from acquiring products from its suppliers in China, Indonesia, Thailand or the Philippines, or significantly increased the cost to the Company of such products, the Company's operations could be seriously disrupted until alternative suppliers were found or alternative markets were developed, with a significant negative impact. See also discussion below under "Economic Factors". Sources of Supply _________________ The Company depends upon independent manufacturers to manufacture high-quality product in a timely and cost-efficient manner and relies upon the availability of sufficient production capacity at its existing manufacturers or the ability to utilize alternative sources of supply. A failure by one or more of the Company's significant manufacturers to meet established criteria for pricing, product quality or timeliness could negatively impact the Company's sales and profitability. In addition, if the Company were to experience significant shortages in raw materials or components used in its products, it could have a negative effect on the Company's business, including increased costs or difficulty in delivering product. Some of the components used in the Company's technologies are obtained from only one or two sources and thus a loss of supply could disrupt production. See also discussion below under "Economic Factors". Risk Associated with Indebtedness _________________________________ In connection with the Company's Dutch Auction share repurchase, the Company incurred $640 million in additional debt to finance the repurchase of shares (as of June 30, 1998, the outstanding balance of such debt was approximately $472 million) and has a $400 million revolving credit line (as of June 30, 1998, there were no borrowings outstanding under the revolving credit line). As a result of this indebtedness, the Company currently faces significantly increased interest expense and debt amortization, as compared to the past. The credit arrangement contains certain covenants (including restrictions on liens and the requirements to maintain a minimum interest coverage ratio and a minimum debt to cash flow ratio) which are intended to limit the Company's future actions and which may also limit the Company's financial, operating and strategic flexibility. In addition, the Company's failure to make timely payments of interest and principal on its debt, or to comply with the material covenants applicable thereto, could result in significant negative consequences. The Company believes that its cash, short-term investments and access to new credit facilities, together with its anticipated cash flow from operations, are adequate for the Company's current and planned needs in 1998. 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 herein, 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. In June 1998, two credit rating agencies, Standard & Poor's Rating Group and Moody's Investors Service, Inc., put the Company on "credit watch" with negative implications, which indicates that these agencies are reviewing the Company's financial condition to determine whether its current credit ratings are still appropriate or whether the ratings should be lowered. No determination has yet been made by either credit agency. If the Company's credit ratings were lowered, it may be more difficult for the Company to borrow and the costs of borrowing would increase, including the costs the Company incurs under some of its existing credit arrangements. Risk of Currency Fluctuations _____________________________ The Company conducts operations in various international countries and a significant portion of its sales are transacted in local currencies. As a result, the Company's revenues are subject to foreign exchange rate fluctuations. 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 foreign currency exchange contracts and options to hedge significant inter-company assets and liabilities denominated in other currencies. However, no assurance can be given that fluctuation in foreign currency exchange rates will not have an adverse impact on the Company's revenues, net profits or financial condition. In 1997 and in the first half of 1998, the Company's international sales, gross margins and profits were negatively impacted by changes in foreign currency exchange rates. Customers _________ Although the Company has no single customer that represents 10% or more of its sales, the Company has certain significant customers, the loss of which could have an adverse effect on its business. There could also be a negative effect on the Company's business if any such significant customer became insolvent or otherwise failed to pay its debts. Intellectual Property _____________________ The Company believes that its trademarks, technologies and designs are of great value. From time to time the Company has been, and may in the future be, the subject of litigation challenging its ownership of certain intellectual property. Loss of the REEBOK, ROCKPORT or GREG NORMAN trademark rights could have a serious impact on the Company's business. Because of the importance of such intellectual property rights, the Company's business is subject to the risk of counterfeiting, parallel trade or intellectual property infringement. The Company is, however, vigilant in protecting its intellectual property rights. Litigation __________ The Company is subject to the normal risks of litigation with respect to its business operations. Economic Factors ________________ The Company's business is subject to economic conditions in the Company's major markets, including, without limitation, recession, inflation, general weakness in retail markets and changes in consumer purchasing power and preferences. Adverse changes in such economic factors could have a negative effect on the Company's business. For example, the recent slowdown in the growth of the athletic footwear and branded apparel markets has had negative effects on the Company's business. In addition, as a result of current market conditions, a number of the Company's competitors have excess inventory which they are attempting to sell off. This over-inventoried, promotional environment has made it more difficult for the Company to sell its products and has negatively impacted the Company's gross margins. The current financial crisis in the Far East has also had a negative impact on the Company's business. The economic problems in Asia have had an adverse effect on the Company's sales to that region. In addition, most of the Company's products are manufactured in the Far East by third party manufacturers. The current economic conditions have made it more difficult for such manufacturers to gain access to working capital and there is a risk that such manufacturers could encounter financial problems which could affect their ability to produce products for the Company. Similar problems have also resulted from the financial difficulties in Latin America. Tax Rate Changes ________________ If the Company was to encounter significant tax rate changes in the major markets in which it operates, it could have an adverse effect on its business or profitability. Global Restructuring Activities _______________________________ The Company is currently undertaking various global restructuring activities designed to enable the Company to achieve operating efficiencies, improve logistics and reduce expenses. There can be no assurance that the Company will be able to effectively execute on its restructuring plans or that such benefits will be achieved. In addition, in the short-term the Company could experience difficulties in product delivery or other logistical operations as a result of its restructuring activities, which could have an adverse effect on the Company's business. In the short-term, the Company could also be subject to increased expenditures and charges from such restructuring activities. The Company is also in the process of eliminating or restructuring certain of its underperforming marketing contracts. There can be no assurance that the Company will be able to successfully restructure such agreements or achieve the cost savings anticipated. Year 2000 _________ The Company has conducted a global review of its computer systems to identify the systems that could be affected by the technical problems associated with the year 2000 and has developed an implementation plan to address the "year 2000" issue. As part of its global restructuring, in 1997 the Company began its global implementation of SAP software, which will replace substantially all legacy systems. The Company presently believes that, with modifications to existing software and converting to SAP software, the year 2000 will not pose significant operational problems for the Company's computer systems. The Company expects its SAP programs to be substantially implemented by 1999 and the implementation is currently on schedule. However, if the modifications and conversions are not implemented or completed in a timely or effective manner, the year 2000 problem could have a material impact on the operations of the Company. In addition, in converting to SAP software, the Company is relying on its software partner to develop new software applications and there could be problems in successfully developing such new applications. Finally, the Company is dependent on its suppliers, joint venture partners and independent distributors to implement appropriate changes to their computer systems to address the "year 2000" issue. The failure of such third parties to effectively address such issue could have an adverse effect on the Company's business. Quarterly Reports _________________ The financial results reflected in the Company's quarterly report on Form 10-Q are not necessarily indicative of the financial results which may be achieved in future quarters or for year-end, which results may vary. -----END PRIVACY-ENHANCED MESSAGE-----