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.
<PAGE>
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
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REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1997
____ ____ ____
(Unaudited) (See Note 1)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
3
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1997
____ ____ ____
(Unaudited) (See Note 1)
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
____________________ _________________
1998 1997 1998 1997
____ ____ ____ ____
<S> <C> <C> <C> <C>
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
========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
________________
1998 1997
____ ____
<S> <C> <C>
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
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REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Amounts in thousands)
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
________________
1998 1997
____ ____
<S> <C> <C>
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
<PAGE>
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
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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:
</TABLE>
<TABLE>
<CAPTION>
Balance Q1 98 Six Months Balance
12/31/97 Additions Payments/ 6/30/98
Utilization
________ _________ ___________ _______
<S> <C> <C> <C> <C>
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
======== ========= ========= ========
</TABLE>
9
<PAGE>
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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
___________________ _________________
1998 1997 1998 1997
____ ____ ____ ____
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
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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
<PAGE>
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
<PAGE>
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
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$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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0000770949
<NAME> REEBOK INTERNATIONAL LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 143,924
<SECURITIES> 0
<RECEIVABLES> 591,594
<ALLOWANCES> 48,014
<INVENTORY> 596,660
<CURRENT-ASSETS> 1,423,194
<PP&E> 369,603
<DEPRECIATION> 212,643
<TOTAL-ASSETS> 1,711,662
<CURRENT-LIABILITIES> 566,229
<BONDS> 635,007
0
0
<COMMON> 932
<OTHER-SE> 492,935
<TOTAL-LIABILITY-AND-EQUITY> 1,711,662
<SALES> 1,640,690
<TOTAL-REVENUES> 1,635,104
<CGS> 1,046,311
<TOTAL-COSTS> 1,046,311
<OTHER-EXPENSES> 557,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,000
<INCOME-PRETAX> 5,099
<INCOME-TAX> 2,311
<INCOME-CONTINUING> 2,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,788
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
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.
