e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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X |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended July 2, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to |
Commission File Number 1-9548
The Timberland Company
(Exact name of registrant as specified in its charter)
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Delaware
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02-0312554 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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200 Domain Drive, Stratham, New Hampshire |
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03885 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrants telephone number, including area code: |
(603) 772-9500 |
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.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer x
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Accelerated Filer o |
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Non-Accelerated
Filer o (Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes x No
On
July 30, 2010, 41,550,103 shares of the registrants Class A Common Stock were outstanding and
10,889,160 shares of the registrants Class B Common Stock were outstanding.
Form 10-Q
Page 2
THE TIMBERLAND COMPANY
FORM 10-Q
TABLE OF CONTENTS
Form 10-Q
Page 3
Cautionary Note Regarding Forward-Looking Statements
The Timberland Company (the Company) wishes to take advantage of The Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, which provide
a safe harbor for certain written and oral forward-looking statements to encourage companies to
provide prospective information. Prospective information is based on managements then current
expectations or forecasts. Such information is subject to the risk that such expectations or
forecasts, or the assumptions used in making such expectations or forecasts, may become inaccurate.
The discussion in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year
ended December 31, 2009 (the Form 10-K) and Part II, Item 1A, Risk Factors, of this Quarterly
Report on Form 10-Q identifies important factors that could affect the Companys 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. The risks included in Part I, Item 1A, Risk Factors, of the
Form 10-K and Part II, Item 1A of this Quarterly Report are not exhaustive. Other sections of the
Form 10-K as well as this Quarterly Report may include additional factors which could adversely
affect the Companys business and financial performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time to time and it is
not possible for management to predict all such risk factors, nor can it assess the impact of all
such risk factors on the Companys business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking Information
As discussed above and in Part I, Item 1A, Risk Factors, of the Form 10-K and Part II, Item 1A of
this Quarterly Report, investors should be aware of certain risks, uncertainties and assumptions
that could affect our actual results and could cause such results to differ materially from those
contained in forward-looking statements made by or on behalf of us. Statements containing the
words may, assumes, forecasts, positions, predicts, strategy, will, expects,
estimates, anticipates, believes, projects, intends, plans, budgets, potential,
continue, target and variations thereof, and other statements contained in this Quarterly
Report regarding matters that are not historical facts are forward-looking statements. Such
statements are based on current expectations only and actual future results may differ materially
from those expressed or implied by such forward-looking statements due to certain risks,
uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not
limited to:
Our ability to successfully market and sell our products in a highly competitive industry
and in view of changing consumer trends and preferences, consumer acceptance of products, and other
factors affecting retail market conditions, including the current global economic environment and
global political uncertainties resulting from the continuing war on terrorism;
Our ability to execute key strategic initiatives;
Our ability to adapt to potential changes in duty structures in countries of import and
export, including anti-dumping measures imposed by the European Union with respect to leather
footwear imported from China and Vietnam;
Our ability to manage our foreign exchange rate risks, and taxes, duties, import
restrictions and other risks related to doing business internationally;
Our ability to locate and retain independent manufacturers to produce lower cost,
high-quality products with rapid turnaround times;
Our reliance on a limited number of key suppliers and a global supply chain;
Our ability to obtain adequate materials at competitive prices;
Our reliance on the financial health of, and the appeal of our products to, our customers;
Our reliance on the financial stability of third parties with which we do business,
including customers, suppliers and distributors;
Our ability to successfully invest in our infrastructure and products based upon advance
sales forecasts;
Form 10-Q
Page 4
Our ability to recover our investment in, and expenditures of, our retail organization
through adequate sales at such retail locations; and
Our ability to respond to actions of our competitors, some of whom have substantially
greater resources than we have.
We undertake no obligation to update publicly any forward-looking statements, whether as a result
of new information, future events or otherwise.
Form 10-Q
Page 5
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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July 2, |
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December 31, |
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July 3, |
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2010 |
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2009 |
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2009 |
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Assets |
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Current assets |
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Cash and equivalents |
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$237,798 |
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$289,839 |
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$183,919 |
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Accounts receivable, net of allowance for doubtful accounts of $11,130
at July 2, 2010, $12,175 at December 31, 2009 and $11,124 at July 3,
2009 |
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86,836 |
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149,178 |
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100,126 |
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Inventory, net |
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177,206 |
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158,541 |
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180,392 |
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Prepaid expense |
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31,506 |
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32,863 |
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35,121 |
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Prepaid income taxes |
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27,244 |
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11,793 |
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24,720 |
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Deferred income taxes |
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27,085 |
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26,769 |
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19,024 |
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Derivative assets |
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7,882 |
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1,354 |
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2,284 |
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Total current assets |
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595,557 |
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670,337 |
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545,586 |
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Property, plant and equipment, net |
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64,502 |
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69,820 |
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74,185 |
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Deferred income taxes |
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18,683 |
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14,903 |
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17,480 |
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Goodwill |
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38,958 |
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44,353 |
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43,870 |
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Intangible assets, net |
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36,195 |
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45,532 |
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46,572 |
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Other assets, net |
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12,670 |
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14,962 |
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14,971 |
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Total assets |
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$766,565 |
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$859,907 |
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$742,664 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$78,946 |
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$79,911 |
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$ 71,423 |
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Accrued expense |
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Payroll and related |
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27,678 |
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43,512 |
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22,395 |
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Other |
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52,877 |
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81,988 |
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54,264 |
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Income taxes payable |
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15,330 |
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21,959 |
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533 |
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Deferred income taxes |
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388 |
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48 |
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- |
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Derivative liabilities |
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91 |
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389 |
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4,565 |
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Total current liabilities |
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175,310 |
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227,807 |
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153,180 |
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Other long-term liabilities |
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38,234 |
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36,483 |
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35,809 |
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Commitments and contingencies |
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Stockholders equity |
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Preferred Stock, $.01 par value; 2,000,000 shares authorized; none issued |
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- |
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- |
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- |
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Class A Common Stock, $.01 par value (1 vote per share); 120,000,000
shares authorized; 75,072,360 shares issued at July 2, 2010, 74,570,388
shares issued at December 31, 2009 and 74,182,602 shares issued at July
3, 2009 |
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751 |
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746 |
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742 |
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Class B Common Stock, $.01 par value (10 votes per share); convertible
into Class A shares on a one-for-one basis; 20,000,000 shares
authorized; 10,889,160 shares issued and outstanding at July 2, 2010,
11,089,160 shares issued and outstanding at December 31, 2009 and
11,417,660 shares issued and outstanding at July 3, 2009 |
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109 |
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111 |
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114 |
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Additional paid-in capital |
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272,820 |
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266,457 |
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264,257 |
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Retained earnings |
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976,978 |
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974,683 |
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914,672 |
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Accumulated other comprehensive income |
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9,478 |
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15,048 |
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9,088 |
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Treasury Stock at cost; 33,511,452 Class A shares at July 2, 2010,
31,131,253 Class A shares at December 31, 2009 and 29,402,811 Class A
shares at July 3, 2009 |
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(707,115 |
) |
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(661,428 |
) |
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(635,198 |
) |
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Total stockholders equity |
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553,021 |
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595,617 |
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553,675 |
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Total liabilities and stockholders equity |
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$766,565 |
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$859,907 |
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$742,664 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 6
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
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For the Quarter Ended |
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For the Six Months Ended |
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July 2, 2010 |
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July 3, 2009 |
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July 2, 2010 |
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July 3, 2009 |
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Revenue |
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$ |
188,954 |
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$ |
179,702 |
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$ |
505,996 |
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$ |
476,350 |
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Cost of goods sold |
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95,446 |
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104,194 |
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254,505 |
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264,153 |
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Gross profit |
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93,508 |
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75,508 |
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251,491 |
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212,197 |
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Operating expense |
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Selling |
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86,124 |
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85,027 |
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178,820 |
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177,295 |
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General and administrative |
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28,942 |
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26,896 |
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56,341 |
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52,313 |
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Impairment of goodwill |
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5,395 |
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- |
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5,395 |
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- |
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Impairment of intangible assets |
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7,854 |
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- |
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7,854 |
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925 |
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Gain on termination of licensing agreements |
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(1,500 |
) |
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- |
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(3,000 |
) |
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- |
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Restructuring |
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- |
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(17 |
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- |
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(121 |
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Total operating expense |
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126,815 |
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111,906 |
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245,410 |
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230,412 |
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Operating income/(loss) |
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(33,307 |
) |
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(36,398 |
) |
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6,081 |
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(18,215 |
) |
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Other income/(expense), net |
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Interest income |
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148 |
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299 |
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221 |
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|
739 |
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Interest expense |
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(142 |
) |
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(117 |
) |
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(281 |
) |
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(238 |
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Other, net |
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269 |
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1,666 |
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136 |
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1,003 |
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Total other income/(expense), net |
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275 |
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1,848 |
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76 |
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1,504 |
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Income/(loss) before income taxes |
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(33,032 |
) |
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(34,550 |
) |
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6,157 |
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(16,711 |
) |
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Income tax provision/(benefit) |
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(9,580 |
) |
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(15,306 |
) |
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3,862 |
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(13,344 |
) |
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Net income/(loss) |
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$ |
(23,452 |
) |
|
$ |
(19,244 |
) |
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$ |
2,295 |
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$ |
(3,367 |
) |
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Earnings/(Loss) per share |
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Basic |
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$ |
(.44 |
) |
|
$ |
(.34 |
) |
|
$ |
.04 |
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|
$ |
(.06 |
) |
Diluted |
|
$ |
(.44 |
) |
|
$ |
(.34 |
) |
|
$ |
.04 |
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|
$ |
(.06 |
) |
Weighted-average shares outstanding |
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Basic |
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|
53,225 |
|
|
|
56,273 |
|
|
|
53,698 |
|
|
|
56,695 |
|
Diluted |
|
|
53,225 |
|
|
|
56,273 |
|
|
|
54,184 |
|
|
|
56,695 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 7
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
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For the Six Months Ended |
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July 2, 2010 |
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July 3, 2009 |
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Cash flows from operating activities: |
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Net income/(loss) |
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$2,295 |
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|
$ (3,367 |
) |
Adjustments to reconcile net income/(loss) to net cash
provided/(used) by operating activities: |
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Deferred income taxes |
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|
(4,811 |
) |
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|
5,224 |
|
Share-based compensation |
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|
3,647 |
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|
2,580 |
|
Depreciation and other amortization |
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|
13,053 |
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|
14,339 |
|
Provision for losses on accounts receivable |
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|
1,584 |
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|
1,564 |
|
Impairment of goodwill |
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|
5,395 |
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|
- |
|
Impairment of intangible assets |
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|
7,854 |
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|
925 |
|
Tax expense from share-based compensation, net of excess benefit |
|
|
(303 |
) |
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|
(444 |
) |
Unrealized (gain)/loss on derivatives |
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(176 |
) |
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|
289 |
|
Other non-cash charges, net |
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|
222 |
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|
514 |
|
Increase/(decrease) in cash from changes in operating assets
and liabilities, net of the effect of business combinations: |
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Accounts receivable |
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53,559 |
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|
67,098 |
|
Inventory |
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(20,139 |
) |
|
|
1,089 |
|
Prepaid expense and other assets |
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1,429 |
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(1,802 |
) |
Accounts payable |
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(700 |
) |
|
|
(25,977 |
) |
Accrued expense |
|
|
(43,006 |
) |
|
|
(35,674 |
) |
Prepaid income taxes |
|
|
(15,451 |
) |
|
|
(8,032 |
) |
Income taxes payable |
|
|
(3,611 |
) |
|
|
(24,678 |
) |
Other liabilities |
|
|
205 |
|
|
|
(226 |
) |
|
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|
|
|
Net cash provided/(used) by operating activities |
|
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1,046 |
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|
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(6,578 |
) |
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Cash flows from investing activities: |
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Acquisition of business, net of cash acquired |
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|
- |
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(1,554 |
) |
Additions to property, plant and equipment |
|
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(7,289 |
) |
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|
(7,757 |
) |
Other |
|
|
(116 |
) |
|
|
(380 |
) |
|
|
|
|
|
Net cash used by investing activities |
|
|
(7,405 |
) |
|
|
(9,691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Common stock repurchases |
|
|
(44,220 |
) |
|
|
(19,388 |
) |
Issuance of common stock |
|
|
2,435 |
|
|
|
1,373 |
|
Excess tax benefit from share-based compensation |
|
|
587 |
|
|
|
133 |
|
Other |
|
|
(634 |
) |
|
|
(177 |
) |
|
|
|
|
|
Net cash used by financing activities |
|
|
(41,832 |
) |
|
|
(18,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents |
|
|
(3,850 |
) |
|
|
1,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and equivalents |
|
|
(52,041 |
) |
|
|
(33,270 |
) |
Cash and equivalents at beginning of period |
|
|
289,839 |
|
|
|
217,189 |
|
|
|
|
|
|
Cash and equivalents at end of period |
|
|
$237,798 |
|
|
|
$183,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
|
$276 |
|
|
|
$232 |
|
Income taxes paid |
|
|
$26,891 |
|
|
|
$13,935 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 8
THE TIMBERLAND COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of The Timberland
Company and its subsidiaries (we, our, us, its, Timberland or the Company). These
unaudited condensed consolidated financial statements should be read in conjunction with our
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2009.
The financial statements included in this Quarterly Report on Form 10-Q are unaudited, but in the
opinion of management, such financial statements include the adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Companys financial position, results of
operations and changes in cash flows for the interim periods presented. The results reported in
these financial statements are not necessarily indicative of the results that may be expected for
the full year due, in part, to seasonal factors. Historically, our revenue has been more heavily
weighted to the second half of the year.
The Companys fiscal quarters end on the Friday closest to the day on which the calendar quarter
ends, except that the fourth quarter and fiscal year end on December 31. The second quarters and
first six months of our fiscal year in 2010 and 2009 ended on July 2, 2010 and July 3, 2009,
respectively.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2010-06 (ASU No. 2010-06), Improving Disclosures About Fair Value Measurements. This
accounting standard update adds new requirements for fair value measurement disclosures about
transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value
disclosures about the level of disaggregation and inputs and valuation techniques used to measure
fair value. ASU No. 2010-06 was effective for the Company beginning January 1, 2010 and
its adoption did not have a material impact on the Companys existing disclosures.
Note 2. Fair Value Measurements
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a
fair value hierarchy that ranks the quality and reliability of the information used to determine
fair value. In general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. Fair values determined by Level 2 inputs utilize data points that are observable such
as quoted prices, interest rates and yield curves. Level 3 inputs are unobservable data points for
the asset or liability, and include situations where there is little, if any, market activity for
the asset or liability. The Company recognizes and reports significant transfers between Level 1
and Level 2, and into and out of Level 3, as of the actual date of the event or change in
circumstances that caused the transfer.
Form 10-Q
Page 9
Financial Assets and Liabilities
The following tables present information about our assets and liabilities measured at fair value on
a recurring basis as of July 2, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
Level 3 |
Impact of Netting |
|
July 2, 2010 |
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ - |
|
$85,004 |
|
$ - |
|
$ - |
|
$85,004 |
|
Mutual funds |
|
$ - |
|
$36,992 |
|
$ - |
|
$ - |
|
$36,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ - |
|
$8,612 |
|
$ - |
|
$(730) |
|
$7,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value
of life insurance |
|
$ - |
|
$6,779 |
|
$ - |
|
$ - |
|
$6,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ - |
|
$821 |
|
$ - |
|
$(730) |
|
$91 |
|
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
Level 3 |
Impact of Netting |
|
December 31, 2009 |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
Cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ - |
|
$70,041 |
|
$ - |
|
$ - |
|
$70,041 |
Mutual funds |
|
$ - |
|
$95,871 |
|
$ - |
|
$ - |
|
$95,871 |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ - |
|
$1,768 |
|
$ - |
|
$(230) |
|
$1,538 |
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value
of life insurance |
|
$ - |
|
$8,036 |
|
$ - |
|
$ - |
|
$8,036 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ - |
|
$621 |
|
$ - |
|
$(230) |
|
$391 |
Cash equivalents, included in cash and equivalents on our unaudited condensed consolidated balance
sheet, include money market mutual funds and time deposits placed with a variety of high credit
quality financial institutions. Time deposits are valued based on current interest rates and
mutual funds are valued at the net asset value of the fund. The carrying values of accounts
receivable and accounts payable approximate their fair values due to their short-term maturities.
The fair value of the derivative contracts in the table above is reported on a gross basis by level
based on the fair value hierarchy with a corresponding adjustment for netting for financial
statement presentation purposes, where appropriate. The Company often enters into derivative
contracts with a single counterparty and certain of these contracts are covered under a master
netting agreement. The fair values of our foreign currency forward contracts are based on quoted
market prices or pricing models using current market rates. As of December 31, 2009, the
derivative contracts above include $184 of assets
and $2 of liabilities included in other assets, net and other long-term liabilities, respectively,
on our unaudited condensed consolidated balance sheet.
The cash surrender value of life insurance represents insurance contracts held as assets in a rabbi
trust to fund the Companys deferred compensation plan. These assets are included in other assets,
net on our unaudited condensed consolidated balance sheet. The cash surrender value of life
insurance is based on the net asset values of the underlying funds available to plan participants.
Form 10-Q
Page 10
Nonfinancial Assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually at the end of
our second quarter and when events occur or circumstances change that would, more likely than not,
reduce the fair value of a business unit or an intangible asset with an indefinite-life below its
carrying value. Events or changes in circumstances that may trigger interim impairment reviews
include significant changes in business climate, operating results, planned investment in the
business unit or an expectation that the carrying amount may not be recoverable, among other
factors.
During the quarter ended July 2, 2010, management concluded that the carrying value of goodwill
exceeded the estimated fair value for its IPath, North America Retail and Europe Retail reporting
units and, accordingly, recorded an impairment charge of $5,395. Management also concluded that
the carrying value of the IPath and howies trademarks and other intangible assets exceeded the
estimated fair value and, accordingly, recorded an impairment charge of $7,854. The Companys
North America Wholesale and Europe Wholesale business units have fair values substantially in
excess of their carrying value. See Note 9 to the unaudited condensed consolidated financial
statements.
Impairment charges included in the second quarter of 2010 unaudited condensed consolidated
statement of operations, by segment, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
Sub- |
|
|
Europe |
|
|
Sub- |
|
|
Total |
|
|
|
|
IPath |
|
|
Retail |
|
|
|
Total |
|
|
IPath |
|
|
howies |
|
|
Retail |
|
|
|
Total |
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
$4,118 |
|
|
|
$794 |
|
|
|
$4,912 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$483 |
|
|
|
$ 483 |
|
|
|
$5,395 |
|
Trademarks |
|
|
2,032 |
|
|
|
- |
|
|
|
2,032 |
|
|
|
1,169 |
|
|
|
3,181 |
|
|
|
- |
|
|
|
4,350 |
|
|
|
6,382 |
|
Other intangibles |
|
|
1,228 |
|
|
|
- |
|
|
|
1,228 |
|
|
|
- |
|
|
|
244 |
|
|
|
- |
|
|
|
244 |
|
|
|
1,472 |
|
|
|
|
|
|
|
|
|
$7,378 |
|
|
|
$794 |
|
|
|
$8,172 |
|
|
|
$1,169 |
|
|
|
$3,425 |
|
|
|
$483 |
|
|
|
$5,077 |
|
|
|
$13,249 |
|
|
|
|
|
|
|
|
These non-recurring fair value measurements were developed using significant unobservable inputs
(Level 3). For goodwill, the primary valuation technique used was the discounted cash flow
analysis based on managements estimates of forecasted cash flows for each business unit, with
those cash flows discounted to present value using rates proportionate with the risks of those cash
flows. In addition, management used a market-based valuation method involving analysis of market
multiples of revenues and earnings before interest, taxes, depreciation and amortization for a
group of similar publicly traded companies and, if applicable, recent transactions involving
comparable companies. The Company believes the blended use of these models balances the inherent
risk associated with either model if used on a stand-alone basis, and this combination is
indicative of the factors a market participant would consider when performing a similar valuation.
For trademark intangible assets, management used the relief-from-royalty method in which fair value
is the discounted value of forecasted royalty revenue arising from a trademark using a royalty rate
that an independent third party would pay for use of that trademark. Further information regarding
the fair value measurements is provided below.
IPath
The IPath® business unit has not met the revenue and earnings growth forecasted at its acquisition
in April 2007. Accordingly, during the second quarter of 2010, management reassessed the
financial expectations of this business as part of its long range planning process. The revenue
and earnings growth assumptions were developed based on near term trends, potential opportunities
and planned investment in the
IPath® brand. Managements business plans and projections were used
to develop the expected cash flows for the next five years and a 4% residual revenue growth rate
applied thereafter. The analysis reflects a market royalty rate of 1.5% and a weighted average
discount rate of 22%, derived primarily from published sources and adjusted for increased market
risk. After the charges in the table above, there was $720 of finite-lived trademark intangible
assets remaining at July 2, 2010. The carrying value of IPath goodwill was reduced to zero.
howies
howies has not met the revenue and earnings growth forecasted at its acquisition in December 2006.
Accordingly, during the second quarter of 2010, management reassessed the financial
expectations of this business as part of its long range planning process. The revenue and earnings
growth assumptions were developed based on near term trends, potential opportunities and planned
investment in the howies® brand. Managements business plans and projections were used to
develop the expected cash flows for the next five years and a 4% residual revenue growth rate
applied thereafter. The analysis reflects a market royalty rate of 2% and a weighted average
discount rate of 24%, derived primarily from published sources and adjusted for increased market
risk. After the charges in the table above, there was $1,200 of indefinite-lived trademark
intangible assets remaining at July 2, 2010.
Form 10-Q
Page 11
North America and Europe Retail
The Companys retail businesses in North America and Europe have been negatively impacted by
continued weakness in the macroeconomic environment, low consumer spending and a longer than
expected economic recovery. The fair value of these businesses using the discounted cash flow
analysis were based on managements business plans and projections for the next five years and a 4%
residual growth thereafter. The analysis reflects a weighted average discount rate in the range of
19%, derived primarily from published sources and adjusted for increased market risk. After the
charges in the table above, the carrying value of the goodwill was zero at July 2, 2010.
On an
ongoing basis, the Company evaluates the carrying value of the GoLite
trademark, which is licensed to a third party, for events or changes
in circumstances indicating the carrying value of the asset may not
be recoverable. Factors considered include the ability of the
licensee to obtain necessary financing, the impact of changes in
economic conditions and an assessment of the Companys ability to
recover all contractual payments when due under the licensing
arrangement. During the first quarter of 2009, using Level 3 input
factors noted above, the Company determined that the carrying value
of the GoLite trademark was impaired and recorded a pre-tax non-cash
charge of approximately $925, which reduced the carrying value of the
trademark to zero at April 3, 2009. The charge is reflected in
our Europe segment.
Note 3. Derivatives
In the normal course of business, the financial position and results of operations of the Company
are impacted by currency rate movements in foreign currency denominated assets, liabilities and
cash flows as we purchase and sell goods in local currencies. We have established policies and
business practices that are intended to mitigate a portion of the effect of these exposures. We
use derivative financial instruments, specifically forward contracts, to manage our currency
exposures. These derivative instruments are viewed as risk management tools and are not used for
trading or speculative purposes. Derivatives entered into by the Company are either designated as
cash flow hedges of forecasted foreign currency transactions or are undesignated economic hedges of
existing intercompany assets and liabilities, certain third party assets and liabilities, and
non-US dollar-denominated cash balances.
Derivative instruments expose us to credit and market risk. The market risk associated with these
instruments resulting from currency exchange movements is expected to offset the market risk of the
underlying transactions being hedged. We do not believe there is a significant risk of loss in the
event of non-performance by the counterparties associated with these instruments because these
transactions are executed with a group of major financial institutions and have varying maturities
through April 2011. As a matter of policy, we enter into these contracts only with counterparties
having a minimum investment-grade or better credit rating. Credit risk is managed through the
continuous monitoring of exposures to such counterparties.
Cash Flow Hedges
The Company principally uses foreign currency forward contracts as cash flow hedges to offset a
portion of the effects of exchange rate fluctuations on certain of its forecasted foreign currency
denominated sales transactions. The Companys cash flow exposures include anticipated foreign
currency transactions, such as foreign currency denominated sales, costs, expenses and
inter-company charges, as well as collections and payments. The risk in these exposures is the
potential for losses associated with the remeasurement of non-functional currency cash flows into
the functional currency. The Company has a hedging program to aid in mitigating its foreign
currency exposures and to decrease the volatility in earnings. Under this hedging program, the
Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures
and recognizes any hedge ineffectiveness in earnings. A hedge is effective if the changes in the
fair value of the derivative provide offset of at least 80 percent and not more than 125 percent of
the changes in the fair value or cash flows of the hedged item attributable to the risk being
hedged. The Company uses regression analysis to assess the effectiveness of a hedge relationship.
Forward contracts designated as cash flow hedging instruments are recorded in our unaudited
condensed consolidated balance sheet at fair value. The effective portion of gains and losses
resulting from changes in the fair value of these hedge instruments are deferred in accumulated
other comprehensive income (OCI) and reclassified to earnings, in cost of goods sold, in the
period that the hedged transaction is recognized in earnings. Cash flows associated with these
contracts are classified as operating cash flows in the statement of cash flows. Hedge
ineffectiveness is evaluated using the hypothetical derivative method, and the ineffective portion
of the hedge is reported in our unaudited condensed consolidated statement of operations in other,
net. The amount of hedge ineffectiveness reported in other, net for the quarters and six months
ended July 2, 2010 and July 3, 2009 was not material.
Form 10-Q
Page 12
As of July 2, 2010, we had forward contracts maturing at various dates through April 2011 to sell
the equivalent of $109,750 in foreign currencies at contracted rates. As of December 31, 2009, we
had forward contracts maturing at various dates through January 2011 to sell the equivalent of
$101,138 in foreign currencies at contracted rates. As of July 3, 2009, we had forward contracts
maturing at various dates through April 2010 to sell the equivalent of $129,155 in foreign
currencies at contracted rates. The contract amount represents the net amount of all purchase and
sale contracts of a foreign currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
Currency |
|
July 2, 2010 |
|
|
December 31, 2009 |
|
|
July 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pound Sterling |
|
|
$22,814 |
|
|
|
$20,657 |
|
|
|
$21,213 |
Euro |
|
|
70,080 |
|
|
|
64,398 |
|
|
|
85,985 |
Japanese Yen |
|
|
16,856 |
|
|
|
16,083 |
|
|
|
21,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$109,750 |
|
|
|
$101,138 |
|
|
|
$129,155 |
|
|
Other Derivative Contracts
We also enter into derivative contracts to manage foreign currency exchange risk on intercompany
accounts receivable and payable, third-party accounts receivable and payable, and non-U.S.
dollar-denominated cash balances using forward contracts. These forward contracts, which are
undesignated hedges of economic risk, are recorded at fair value on the balance sheet, with changes
in the fair value of these instruments recognized in earnings immediately. The gains or losses
related to the contracts largely offset the remeasurement of those assets and liabilities. Cash
flows associated with these contracts are classified as operating cash flows in the statement of
cash flows.
As of July 2, 2010, we had forward contracts maturing at various dates through October 2010 to sell
the equivalent of $38,496 in foreign currencies at contracted rates and to buy the equivalent of
$(46,430) in foreign currencies at contracted rates. As of December 31, 2009, we had forward
contracts maturing at various dates through April 2010 to sell the equivalent of $44,293 in foreign
currencies at contracted rates and to buy the equivalent of $(22,572) in foreign currencies at
contracted rates. As of July 3, 2009, we had forward contracts maturing at various dates through
October 2009 to sell the equivalent of $39,219 in foreign currencies at contracted rates and to buy
the equivalent of $(56,631) in foreign currencies at contracted rates. The contract amount
represents the net amount of all purchase and sale contracts of a foreign currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
Currency |
|
July 2, 2010 |
|
|
December 31, 2009 |
|
|
July 3, 2009 |
|
|
|
|
Pound Sterling |
|
|
$(18,221) |
|
|
|
$(12,922) |
|
|
|
$(16,989) |
Euro |
|
|
(6,558) |
|
|
|
14,122 |
|
|
|
(16,043) |
Japanese Yen |
|
|
7,309 |
|
|
|
8,013 |
|
|
|
6,782 |
Canadian Dollar |
|
|
4,855 |
|
|
|
8,204 |
|
|
|
5,995 |
Norwegian Kroner |
|
|
2,711 |
|
|
|
2,335 |
|
|
|
1,559 |
Swedish Krona |
|
|
1,970 |
|
|
|
1,969 |
|
|
|
1,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$(7,934) |
|
|
|
$21,721 |
|
|
|
$(17,412) |
|
|
Form 10-Q
Page 13
Fair Value of Derivative Instruments
The following table summarizes the fair values and presentation in the unaudited condensed
consolidated balance sheets for derivatives, which consist of foreign exchange forward contracts,
as of July 2, 2010, December 31, 2009 and July 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Fair Value |
|
|
Fair Value |
|
|
|
July 2, |
|
|
December 31, |
|
|
July 3, |
|
|
July 2, |
|
|
December 31, |
|
|
July 3, |
|
Balance Sheet Location |
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as
hedge instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
$8,437 |
|
|
|
$1,313 |
|
|
|
$2,099 |
|
|
|
$679 |
|
|
|
$224 |
|
|
|
$ - |
|
Derivative liabilities |
|
|
45 |
|
|
|
6 |
|
|
|
49 |
|
|
|
57 |
|
|
|
335 |
|
|
|
4,513 |
|
Other assets, net |
|
|
- |
|
|
|
184 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other long-term liabilities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
|
|
|
|
|
$8,482 |
|
|
|
$1,503 |
|
|
|
$2,148 |
|
|
|
$736 |
|
|
|
$561 |
|
|
|
$4,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedge instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
$124 |
|
|
|
$265 |
|
|
|
$185 |
|
|
|
$ - |
|
|
|
$ - |
|
|
|
$ - |
|
Derivative liabilities |
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
85 |
|
|
|
60 |
|
|
|
101 |
|
|
|
|
|
|
|
|
$130 |
|
|
|
$265 |
|
|
|
$185 |
|
|
|
$85 |
|
|
|
$ 60 |
|
|
|
$ 101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
$8,612 |
|
|
|
$1,768 |
|
|
|
$2,333 |
|
|
|
$821 |
|
|
|
$621 |
|
|
|
$4,614 |
|
|
|
|
|
The Effect of Derivative Instruments on the Statements of Operations for the Quarters Ended
July 2, 2010 and July 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) |
|
|
|
|
|
|
|
Amount of Gain/(Loss) |
|
|
Location of Gain/(Loss) |
|
Reclassified from |
|
|
|
Recognized in OCI on |
|
|
Reclassified from |
|
Accumulated OCI into |
|
Derivatives in |
|
Derivatives, Net of Taxes |
|
|
Accumulated OCI into |
|
Income |
|
|
|
|
|
Cash Flow |
|
(Effective Portion) |
|
Income |
|
(Effective Portion) |
Hedging Relationships |
|
2010 |
|
2009 |
|
(Effective Portion) |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$7,358 |
|
$(2,247) |
|
Cost of goods sold |
|
$273 |
|
$343 |
The Company expects to reclassify pre-tax gains of $7,746 to the income statement within the next
twelve months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) |
|
|
|
|
|
Recognized in |
|
Derivatives not Designated |
|
Location of Gain/(Loss)Recognized |
|
Income on Derivatives |
as Hedging Instruments |
|
In Income on Derivatives |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other, net |
|
$1,545 |
|
$223 |
Form 10-Q
Page 14
During the quarter ended July 3, 2009, the Company de-designated certain cash flow hedges due to
settle in the quarter that related to its Japanese yen exposure. Included in other, net above is a
net loss of approximately $14 related to these contracts.
The Effect of Derivative Instruments on the Statements of Operations for the Six Months Ended
July 2, 2010 and July 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) |
|
|
|
|
|
|
|
Amount of Gain/(Loss) |
|
|
Location of Gain/(Loss) |
|
Reclassified from |
|
|
|
Recognized in OCI on |
|
|
Reclassified from |
|
Accumulated OCI into |
|
Derivatives in |
|
Derivatives, Net of Taxes |
|
|
Accumulated OCI into |
|
Income |
|
|
|
|
|
Cash Flow |
|
(Effective Portion) |
|
Income |
|
(Effective Portion) |
Hedging Relationships |
|
2010 |
|
2009 |
|
(Effective Portion) |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$7,358 |
|
$(2,247) |
|
Cost of goods sold |
|
$1,606 |
|
$7,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) |
|
|
|
|
|
Recognized in |
|
Derivatives not Designated |
|
Location of Gain/(Loss)Recognized |
|
Income on Derivatives |
|
as Hedging Instruments |
|
In Income on Derivatives |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other, net |
|
$(622) |
|
$2,647 |
Note 4. Share-Based Compensation
Share-based compensation costs were as follows in the quarters and six months ended July 2, 2010
and July 3, 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
July 2, 2010 |
|
July 3, 2009 |
Cost of goods sold |
|
$ |
107 |
|
|
$ |
270 |
|
Selling expense |
|
|
672 |
|
|
|
956 |
|
General and administrative expense |
|
|
1,310 |
|
|
|
543 |
|
|
|
|
|
|
Total share-based compensation |
|
$ |
2,089 |
|
|
$ |
1,769 |
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
July 2, 2010 |
|
July 3, 2009 |
Cost of goods sold |
|
$ |
188 |
|
|
$ |
358 |
|
Selling expense |
|
|
1,171 |
|
|
|
1,424 |
|
General and administrative expense |
|
|
2,288 |
|
|
|
798 |
|
|
|
|
|
|
Total share-based compensation |
|
$ |
3,647 |
|
|
$ |
2,580 |
|
|
|
|
|
|
Form 10-Q
Page 15
Long Term Incentive Programs
2010 Executive Long Term Incentive Program
On March 3, 2010, the Management Development and Compensation Committee of the Board of Directors
approved the terms of The Timberland Company 2010 Executive Long Term Incentive Program (2010
LTIP) with respect to equity awards to be made to certain of the Companys executives and
employees. On March 4, 2010, the Board of Directors also approved the 2010 LTIP with respect to
the Companys Chief Executive Officer. The 2010 LTIP was established under the Companys 2007
Incentive Plan. The awards are subject to future performance, and consist of performance stock
units (PSUs), equal in value to one share of the Companys Class A Common Stock, and performance
stock options (PSOs), with an exercise price of $19.45 (the closing price of the Companys Class
A Common Stock as quoted on the New York
Stock Exchange on March 4, 2010, the date of grant). On May 13, 2010, additional awards were made
under the 2010 LTIP consisting of PSUs equal in value to one share of the Companys Class A Common
Stock, and PSOs with an exercise price of $22.55 (the closing price of the Companys Class A Common
Stock as quoted on the New York Stock Exchange on May 13, 2010, the date of grant). Shares with
respect to the PSUs will be granted and will vest following the end of the applicable performance
period and approval by the Board of Directors, or a committee thereof, of the achievement of the
applicable performance metric. The PSOs will vest in three equal annual installments following the
end of the applicable performance period and approval by the Board of Directors, or a committee
thereof, of the achievement of the applicable performance metric. The payout of the performance
awards will be based on the Companys achievement of certain levels of revenue growth and earnings
before interest, taxes, depreciation and amortization (EBITDA), with threshold, budget, target
and maximum award levels based upon actual revenue growth and EBITDA of the Company during the
applicable performance periods equaling or exceeding such levels. The performance period for the
PSUs is the three-year period from January 1, 2010 through December 31, 2012, and the performance
period for the PSOs is the twelve-month period from January 1, 2010 through December 31, 2010. No
awards shall be made or earned, as the case may be, unless the threshold goal is attained, and the
maximum payout may not exceed 200% of the target award.
The maximum number of shares to be awarded with respect to PSUs under the 2010 LTIP is 527,800,
which, if earned, will be settled in early 2013. Based on current estimates, unrecognized
compensation expense with respect to the 2010 PSUs was $2,162 as of July 2, 2010. This expense is
expected to be recognized over a weighted-average remaining period of 2.7 years.
The maximum number of shares subject to exercise with respect to PSOs under the 2010 LTIP is
737,640, which, if earned, will be settled, subject to the vesting schedule noted above, in early
2011. Based on current estimates, unrecognized compensation expense related to the 2010 PSOs was
$2,048 as of July 2, 2010. This expense is expected to be recognized over a weighted-average
remaining period of 2.7 years.
2009 Executive Long Term Incentive Program
On March 4, 2009, the Management Development and Compensation Committee of the Board of Directors
approved the terms of The Timberland Company 2009 Executive Long Term Incentive Program (2009
LTIP) with respect to equity awards to be made to certain of the Companys executives and
employees. On March 5, 2009, the Board of Directors also approved the 2009 LTIP with respect to
the Companys Chief Executive Officer. The 2009 LTIP was established under the Companys 2007
Incentive Plan. The awards are subject to future performance, and consist of PSUs, equal in value
to one share of the Companys Class A Common Stock, and PSOs, with an exercise price of $9.34 (the
closing price of the Companys Class A Common Stock as quoted on the New York Stock Exchange on
March 5, 2009, the date of grant). On May 21, 2009, additional awards were made under the 2009
LTIP consisting of PSUs equal in value to one share of the Companys Class A Common Stock, and PSOs
with an exercise price of $12.93 (the closing price of the Companys Class A Common Stock as quoted
on the New York Stock Exchange on May 21, 2009, the date of grant). Shares with respect to the
PSUs will be granted and will vest following the end of the applicable performance period and
approval by the Board of Directors, or a committee thereof, of the achievement of the applicable
performance metric. The PSOs will vest in three equal annual installments following the end of the
applicable performance period and approval by the Board of Directors, or a committee thereof, of
the achievement of the applicable performance metric. The payout of the performance awards will be
based on the Companys achievement of certain levels of EBITDA, with threshold, budget, target and
maximum award levels based upon actual EBITDA of the Company during the applicable performance
periods equaling or exceeding such levels. The performance period for the PSUs is the three-year
period from January 1, 2009 through December 31, 2011, and the performance period for the PSOs was
the twelve-month period from January 1, 2009 through December 31, 2009. No awards shall be made or
earned, as the case may be, unless the threshold goal is attained, and the maximum payout may not
exceed 200% of the target award.
The maximum number of shares to be awarded with respect to PSUs under the 2009 LTIP is 750,000,
which, if earned, will be settled in early 2012. Based on current estimates, unrecognized
compensation expense with respect to the 2009 PSUs
Form 10-Q
Page 16
was $1,679 as of July 2, 2010. This expense is
expected to be recognized over a weighted-average remaining period of 1.7 years.
Based on actual performance, the number of shares subject to exercise with respect to PSOs under
the 2009 LTIP is 599,619, which shares were settled on March 4, 2010, subject to the vesting
schedule noted above.
The Company estimates the fair value of its PSOs on the date of grant using the Black-Scholes
option valuation model, which employs the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2010 LTIP |
|
2009 LTIP |
|
|
For the Quarter |
|
For the Quarter |
|
|
Ended July 2, |
|
Ended July 3, |
|
|
2010 |
|
2009 |
Expected volatility |
|
|
48.7 |
% |
|
|
43.9 |
% |
Risk-free interest rate |
|
|
2.5 |
% |
|
|
1.9 |
% |
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
Expected dividends |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
2010 LTIP |
|
2009 LTIP |
|
|
For the Six Months |
|
For the Six Months |
|
|
Ended July 2, 2010 |
|
Ended July 3, 2009 |
Expected volatility |
|
|
49.3 |
% |
|
|
41.9 |
% |
Risk-free interest rate |
|
|
2.8 |
% |
|
|
1.9 |
% |
Expected life (in years) |
|
|
6.3 |
|
|
|
6.4 |
|
Expected dividends |
|
|
- |
|
|
|
- |
|
The following summarizes activity associated with stock options earned under the Companys 2009
LTIP and excludes the performance-based awards noted above under the 2010 LTIP for which
performance conditions have not been met:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Term |
|
Value |
Outstanding at January 1, 2010 |
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
Settled |
|
|
599,619 |
|
|
|
9.52 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(26,735 |
) |
|
|
9.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 2, 2010 |
|
|
572,884 |
|
|
$ |
9.53 |
|
|
|
8.68 |
|
|
$ |
3,700 |
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
July 2, 2010 |
|
|
525,446 |
|
|
$ |
9.52 |
|
|
|
8.68 |
|
|
$ |
3,399 |
|
|
|
|
|
|
|
|
|
|
Exercisable at July 2, 2010 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to the 2009 PSOs was $1,147 as of July 2, 2010. This
expense is expected to be recognized over a weighted-average remaining period of 1.8 years.
Form 10-Q
Page 17
Stock Options
The Company estimates the fair value of its stock option awards on the date of grant using the
Black-Scholes option valuation model, which employs the assumptions noted in the following table,
for stock option awards excluding awards issued under the Companys Long Term Incentive Programs
discussed above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
For the Six Months Ended |
|
|
July 2, 2010 |
|
July 3, 2009 |
|
July 2, 2010 |
|
July 3, 2009 |
Expected volatility |
|
|
48.7 |
% |
|
|
43.9 |
% |
|
|
48.7 |
% |
|
|
43.2 |
% |
Risk-free interest rate |
|
|
2.5 |
% |
|
|
1.9 |
% |
|
|
2.5 |
% |
|
|
2.0 |
% |
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
6.2 |
|
Expected dividends |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
The following summarizes transactions for the six months ended July 2, 2010, under stock option
arrangements excluding awards under the 2009 LTIP, which are summarized above, and the
performance-based awards noted above under the 2010 LTIP for which performance conditions have
not been met:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Term |
|
Value |
Outstanding at January 1, 2010 |
|
|
3,908,270 |
|
|
$ |
25.05 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
119,240 |
|
|
|
22.39 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(126,927 |
) |
|
|
15.04 |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(145,046 |
) |
|
|
26.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 2, 2010 |
|
|
3,755,537 |
|
|
$ |
25.24 |
|
|
|
5.05 |
|
|
$ |
1,943 |
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
July 2, 2010 |
|
|
3,707,746 |
|
|
$ |
25.33 |
|
|
|
5.00 |
|
|
$ |
1,880 |
|
|
|
|
|
|
|
|
|
|
Exercisable at July 2, 2010 |
|
|
3,267,746 |
|
|
$ |
26.72 |
|
|
|
4.49 |
|
|
$ |
756 |
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to nonvested stock options was $2,058 as of July 2, 2010.
This expense is expected to be recognized over a weighted-average remaining period of 1.6 years.
Nonvested Shares
Changes in the Companys nonvested shares and restricted stock units, excluding awards under the
Companys Long Term Incentive Programs discussed above, for the six months ended July 2, 2010 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
Stock |
|
Grant Date |
|
Stock |
|
Grant Date |
|
|
Awards |
|
Fair Value |
|
Units |
|
Fair Value |
Nonvested at January 1, 2010 |
|
|
86,102 |
|
|
|
$15.59 |
|
|
|
297,758 |
|
|
|
$13.74 |
|
Awarded |
|
|
- |
|
|
|
- |
|
|
|
90,592 |
|
|
|
22.48 |
|
Vested |
|
|
(30,061 |
) |
|
|
10.25 |
|
|
|
(136,788 |
) |
|
|
13.52 |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
(13,903 |
) |
|
|
15.11 |
|
|
|
|
|
|
|
|
|
|
Nonvested at July 2, 2010 |
|
|
56,041 |
|
|
|
$18.46 |
|
|
|
237,659 |
|
|
|
$17.11 |
|
|
|
|
|
|
|
|
|
|
Expected to vest at July 2, 2010 |
|
|
56,041 |
|
|
|
$18.46 |
|
|
|
215,550 |
|
|
|
$16.99 |
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to nonvested restricted stock awards was $62 as of July
2, 2010. The expense is expected to be recognized over a weighted-average remaining period of 0.7
years. Unrecognized compensation expense related to nonvested restricted stock units was $3,049 as
of July 2, 2010. The expense is expected to be recognized over a weighted-average remaining period
of 1.4 years.
Form 10-Q
Page 18
Note 5. Earnings/(Loss) Per Share
In June 2008, the FASB issued ASC 260-10-45-60 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (ASC 260-10-45-60) which became
effective for the Company beginning January 1, 2009. ASC 260-10-45-60 clarifies that share-based
payment awards that entitle their holders to receive nonforfeitable dividends before vesting,
regardless of whether paid or unpaid, should be considered participating securities and included in
the computation of earnings per share pursuant to the two-class method. The adoption of ASC
260-10-45-60 did not have a material impact on the Companys consolidated financial statements.
Basic earnings per share (EPS) excludes common stock equivalents and is computed by dividing net
income by the weighted-average number of common shares outstanding for the periods presented.
Diluted EPS reflects the potential dilution that would occur if potentially dilutive securities
such as stock options were exercised and nonvested shares vested, to the extent such securities
would not be anti-dilutive.
Basic and diluted loss per share (LPS) exclude common stock equivalents and are computed by
dividing net loss by the weighted-average number of common shares outstanding for the periods
presented. Net loss for the quarters ended July 2, 2010 and July 3, 2009 were $(23,452) and
$(19,244), respectively, and weighted-average shares outstanding for the quarters ended July 2,
2010 and July 3, 2009 were 53,225 and 56,273, respectively, resulting in a basic and diluted LPS of
$(.44) and $(.34) for the quarters ended July 2, 2010 and July 3, 2009, respectively.
The following is a reconciliation of the number of shares (in thousands) for the basic and diluted
EPS/(LPS) computations for the six months ended July 2, 2010 and July 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
July 2, 2010 |
|
July 3, 2009 |
|
|
|
|
|
|
Weighted |
|
Per- |
|
|
|
|
|
Weighted |
|
Per- |
|
|
Net |
|
- Average |
|
Share |
|
Net |
|
- Average |
|
Share |
|
|
Income |
|
Shares |
|
Amount |
|
Loss |
|
Shares |
|
Amount |
|
|
|
|
|
Basic EPS/(LPS) |
|
$ |
2,295 |
|
|
|
53,698 |
|
|
$ |
.04 |
|
|
$ |
(3,367 |
) |
|
|
56,695 |
|
|
$ |
(.06 |
) |
Effect of dilutive
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
employee stock
purchase plan
shares |
|
- |
|
|
323 |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Nonvested shares |
|
- |
|
|
163 |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Diluted EPS/(LPS) |
|
$ |
2,295 |
|
|
|
54,184 |
|
|
$ |
.04 |
|
|
$ |
(3,367 |
) |
|
|
56,695 |
|
|
$ |
(.06 |
) |
|
|
|
|
|
The following securities (in thousands) were outstanding as of July 2, 2010 and July 3, 2009, but
were not included in the computation of diluted EPS/(LPS) as their inclusion would be
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
For the Six Months Ended |
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
Anti-dilutive securities |
|
|
2,967 |
|
|
|
4,683 |
|
|
|
2,491 |
|
|
|
4,694 |
|
Note 6. Comprehensive Income/(Loss)
Comprehensive income/(loss) for the quarters and six months ended July 2, 2010 and July 3, 2009 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
For the Six Months Ended |
|
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
Net income/(loss) |
|
|
$(23,452 |
) |
|
|
$(19,244 |
) |
|
|
$2,295 |
|
|
|
$(3,367 |
) |
Change in cumulative translation adjustment |
|
|
(4,512 |
) |
|
|
7,152 |
|
|
|
(11,990 |
) |
|
|
3,382 |
|
Change in fair value of cash flow hedges,
net of taxes |
|
|
2,412 |
|
|
|
(5,699 |
) |
|
|
6,466 |
|
|
|
(6,837 |
) |
Change in other adjustments, net of taxes |
|
|
6 |
|
|
|
- |
|
|
|
(46 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
$(25,546 |
) |
|
|
$(17,791 |
) |
|
|
$(3,275 |
) |
|
|
$(6,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Form 10-Q
Page 19
The components of accumulated other comprehensive income as of July 2, 2010, December
31, 2009 and July 3, 2009 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2010 |
|
|
December 31, 2009 |
|
|
July 3, 2009 |
Cumulative translation adjustment |
|
|
$1,663 |
|
|
|
$13,653 |
|
|
|
$11,158 |
|
Fair value of cash flow hedges, net of taxes of $388
at July 2, 2010, $47 at December 31, 2009 and $(118)
at July 3, 2009 |
|
|
7,370 |
|
|
|
904 |
|
|
|
(2,208) |
|
Other adjustments, net of taxes of $105 at July 2, 2010,
$147 at December 31, 2009 and $7 at July 3, 2009 |
|
|
445 |
|
|
|
491 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$9,478 |
|
|
|
$15,048 |
|
|
|
$9,088 |
|
|
|
|
|
|
|
|
|
|
|
Note 7. Business Segments and Geographic Information
The Company has three reportable segments: North America, Europe and Asia. The composition of the
segments is consistent with that used by the Companys chief operating decision maker.
The North America segment is comprised of the sale of products to wholesale and retail customers in
North America. It includes Company-operated specialty and factory outlet stores in the United
States and our United States e-commerce business. This segment also includes royalties from
licensed products sold worldwide, the related management costs and expenses associated with our
worldwide licensing efforts, and certain marketing expenses and value-added services. Beginning in
the first quarter of 2010, results for the North America segment include certain U.S. distribution
expenses, customer operations and service costs, credit management and short-term incentive
compensation costs that were recorded in Unallocated Corporate in prior quarters. These prior
period costs have been reclassified to North America to conform to the current period presentation.
The Europe and Asia segments each consist of the marketing, selling and distribution of footwear,
apparel and accessories outside of the United States. Products are sold outside of the United
States through our subsidiaries (which use wholesale, retail and e-commerce channels to sell
footwear, apparel and accessories), franchisees and independent distributors. Certain distributor
revenue and operating income reflected in our Europe segment in prior periods has been reclassified
to Asia to conform to the current period presentation. Additionally, certain expenses, primarily
related to short-term incentive compensation costs previously reported in Unallocated Corporate,
have been reclassified to Europe and Asia to conform to the current period presentation.
Unallocated Corporate consists primarily of corporate finance, information services, legal and
administrative expenses, share-based compensation costs, global marketing support expenses,
worldwide product development costs and other costs incurred in support of Company-wide activities.
Unallocated Corporate also includes certain value chain costs such as sourcing and logistics, as
well as inventory variances. Beginning in the first quarter of 2010, certain U.S. distribution
expenses and short-term incentive compensation costs previously reported in Unallocated Corporate
were reclassified to North America, Europe and Asia. Additionally, Unallocated Corporate includes
total other income/(expense), net, which is comprised of interest income, interest expense, and
other, net, which includes foreign exchange gains and losses resulting from changes in the fair
value of financial derivatives not designated as hedges, currency gains and losses incurred on the
settlement of local currency denominated assets and liabilities, and other miscellaneous
non-operating income/(expense). Such income/(expense) is not allocated among the reportable
business segments.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. We evaluate segment performance based on revenue and operating
income. Total assets are disaggregated to the extent that assets apply specifically to a single
segment. Unallocated Corporate assets primarily consist of cash and equivalents, tax assets,
manufacturing/sourcing assets, computers and related equipment, and transportation and distribution
equipment.
Operating income/(loss) shown below for the quarter and six months ended July 2, 2010 includes
impairment charges of $8,172 and $5,077 in North America and Europe, respectively, related to
goodwill and certain other intangible assets. Operating income for
North America for the quarter and six months ended July 2, 2010
also includes gains related to the termination of licensing
agreements of $1,500 and $3,000, respectively. Operating income for Europe for the six months ended
July 3, 2009 includes an impairment charge of $925 related to a certain intangible asset. See
Notes 2 and 9 to the unaudited condensed consolidated financial statements for additional
information.
Form 10-Q
Page 20
For the Quarter Ended July 2, 2010 and July 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Asia |
|
|
Corporate |
|
|
Consolidated |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
$91,995 |
|
|
|
$66,750 |
|
|
|
$30,209 |
|
|
$ |
- |
|
|
|
$188,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
2,921 |
|
|
|
(11,812 |
) |
|
|
2,630 |
|
|
|
(27,046 |
) |
|
|
(33,307) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
|
2,921 |
|
|
|
(11,812 |
) |
|
|
2,630 |
|
|
|
(26,771 |
) |
|
|
(33,032) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
211,059 |
|
|
|
323,512 |
|
|
|
49,459 |
|
|
|
182,535 |
|
|
|
766,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
31,964 |
|
|
|
6,994 |
|
|
|
- |
|
|
|
- |
|
|
|
38,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
$86,314 |
|
|
|
$65,828 |
|
|
|
$27,560 |
|
|
$ |
- |
|
|
|
$179,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
1,209 |
|
|
|
(10,574 |
) |
|
|
(688 |
) |
|
|
(26,345 |
) |
|
|
(36,398) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
|
1,209 |
|
|
|
(10,574 |
) |
|
|
(688 |
) |
|
|
(24,497 |
) |
|
|
(34,550) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
225,085 |
|
|
|
292,668 |
|
|
|
42,697 |
|
|
|
182,214 |
|
|
|
742,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
36,876 |
|
|
|
6,994 |
|
|
|
- |
|
|
|
- |
|
|
|
43,870 |
|
For the Six Months Ended July 2, 2010 and July 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Asia |
|
|
Corporate |
|
|
Consolidated |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
$213,853 |
|
|
|
$218,380 |
|
|
|
$73,763 |
|
|
$ |
- |
|
|
|
$505,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
24,563 |
|
|
|
25,456 |
|
|
|
9,477 |
|
|
|
(53,415 |
) |
|
|
6,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
|
24,563 |
|
|
|
25,456 |
|
|
|
9,477 |
|
|
|
(53,339 |
) |
|
|
6,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
$206,172 |
|
|
|
$205,358 |
|
|
|
$64,820 |
|
|
$ |
- |
|
|
|
$476,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
10,770 |
|
|
|
19,222 |
|
|
|
1,202 |
|
|
|
(49,409 |
) |
|
|
(18,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
|
10,770 |
|
|
|
19,222 |
|
|
|
1,202 |
|
|
|
(47,905 |
) |
|
|
(16,711 |
) |
The following summarizes our revenue by product for the quarters and six months ended July 2, 2010
and July 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
For the Six Months Ended |
|
|
July 2, |
|
July 3, |
|
July 2, |
|
July 3, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Footwear |
|
|
$131,589 |
|
|
|
$126,954 |
|
|
|
$357,150 |
|
|
|
$338,595 |
|
Apparel and accessories |
|
|
52,069 |
|
|
|
47,241 |
|
|
|
137,758 |
|
|
|
125,905 |
|
Royalty and other |
|
|
5,296 |
|
|
|
5,507 |
|
|
|
11,088 |
|
|
|
11,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$188,954 |
|
|
|
$179,702 |
|
|
|
$505,996 |
|
|
|
$476,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form 10-Q
Page 21
Note 8. Inventory, net
Inventory, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2010 |
|
December 31, 2009 |
|
July 3, 2009 |
Materials |
|
$ |
9,102 |
|
|
$ |
7,944 |
|
|
$ |
8,368 |
|
Work-in-process |
|
|
1,382 |
|
|
|
740 |
|
|
|
920 |
|
Finished goods |
|
|
166,722 |
|
|
|
149,857 |
|
|
|
171,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
177,206 |
|
|
$ |
158,541 |
|
|
$ |
180,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Goodwill and Intangibles
The Company completed its annual impairment testing for goodwill and indefinite-lived intangible
assets in the second quarter of 2010, and determined that the carrying values of certain goodwill
and intangible assets, primarily related to its IPath® and howies® brands,
exceeded fair value. Accordingly, the Company recorded non-cash impairment charges of $5,395 and
$7,854 for goodwill and intangible assets, respectively, in its consolidated statement of
operations. The impairment charge reduced the goodwill related to the IPath, North America retail,
and Europe retail reporting units to zero. The charge of $7,854 reduced the trademark and other
intangible assets of IPath and howies to their respective fair values of $720 and $1,200. See Note
2 to the unaudited condensed consolidated financial statements for additional information.
A summary of goodwill activity by segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
Europe |
|
Asia |
|
Total |
|
|
|
Balance at December 31, 2009 |
|
$ |
36,876 |
|
|
$ |
7,477 |
|
|
|
- |
|
|
$ |
44,353 |
|
Impairment charges |
|
|
(4,912) |
|
|
|
(483) |
|
|
|
- |
|
|
|
(5,395) |
|
|
|
|
Balance at July 2, 2010 |
|
$ |
31,964 |
|
|
$ |
6,994 |
|
|
|
- |
|
|
$ |
38,958 |
|
|
|
|
Intangible assets consist of trademarks and other intangible assets. Other intangible assets
consist of customer, patent and non-competition related intangible assets. Intangible assets
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
2, 2010 |
|
|
December
31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Gross |
|
|
Amortization |
|
|
Value |
|
|
Gross |
|
|
Amortization |
|
|
Value |
|
Trademarks (indefinite-lived) |
|
|
$32,370 |
|
|
|
$ - |
|
|
|
$32,370 |
|
|
|
$35,841 |
|
|
|
$ - |
|
|
|
$35,841 |
|
Trademarks (finite-lived) |
|
|
4,608 |
|
|
|
(2,113 |
) |
|
|
2,495 |
|
|
|
10,239 |
|
|
|
(4,149 |
) |
|
|
6,090 |
|
Other intangible assets (finite-lived) |
|
|
5,971 |
|
|
|
(4,641 |
) |
|
|
1,330 |
|
|
|
10,723 |
|
|
|
(7,122 |
) |
|
|
3,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$42,949 |
|
|
|
$(6,754 |
) |
|
|
$36,195 |
|
|
|
$56,803 |
|
|
|
$(11,271 |
) |
|
|
$45,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Acquisition
On March 16, 2009, we acquired 100% of the stock of Glaudio Fashion B.V. (Glaudio) for
approximately $1,500, net of cash acquired. Glaudio operates nine Timberland® retail
stores in the Netherlands and Belgium which sell Timberland® footwear, apparel, leather
goods and product-care products for men, women and kids. The acquisition was effective March 1,
2009, and its results have been included in our Europe segment from the effective date of the
acquisition. The acquisition of Glaudio was not material to the results of operations, financial
position or cash flows of the Company.
Form 10-Q
Page 22
Note 11. Income Taxes
In February 2009, the Company received notification that our U.S. federal tax examinations for 2006
and 2007 had been completed. Accordingly, in the first quarter of 2009, we reversed approximately
$6,400 of accruals related to uncertain tax positions. During the second quarter of 2009, we
recorded a net benefit of approximately $140 in our tax provision related to the settlement of
certain foreign tax audits.
In December 2009, we received a Notice of Assessment from the Internal Revenue Department of Hong
Kong for approximately $17,600 with respect to the tax years 2004 through 2008. In connection with
the assessment, the Company was required to make payments to the Internal Revenue Department of
Hong Kong totaling approximately $900 in the first quarter of 2010 and $7,500 in the second quarter
of 2010. We believe we have a sound defense to the proposed adjustment and
will continue to firmly oppose the assessment. We believe that the assessment does not impact the
level of liabilities for our income tax contingencies. However, actual resolution may differ from
our current estimates, and such differences could have a material impact on our future effective
tax rate and our results of operations.
Note 12. Share Repurchase
On March 10, 2008, our Board of Directors approved the repurchase of up to 6,000,000 shares of our
Class A Common Stock. Shares repurchased under this authorization totaled 301,866 and 1,324,259
for the quarter and six months ended July 2, 2010, respectively. As of July 2, 2010, there were no
shares remaining available for repurchase under this authorization.
On December 3, 2009, our Board of Directors approved the repurchase of up to an additional
6,000,000 shares of our Class A Common Stock. Shares repurchased under this authorization totaled
1,022,767 for the quarter and six months ended July 2, 2010. As of July 2, 2010, 4,977,233 shares
remained available for repurchase under this authorization.
From time to time, we use plans adopted under Rule 10b5-1 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended, to facilitate share
repurchases.
During the first quarter of 2010, 200,000 shares of our Class B Common Stock were converted to an
equivalent amount of our Class A Common Stock.
Note 13. Litigation
We are involved in various litigation and legal proceedings that have arisen in the ordinary course
of business. Management believes that the ultimate resolution of any such matters will not have a
material adverse effect on our unaudited condensed consolidated financial statements.
Note 14. Subsequent Event
In July 2010, we received final approval associated with tax clearance for certain closed foreign
operations. Accordingly, in the third quarter of 2010, we will record a net benefit of
approximately $3,100 related to uncertain tax positions.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is managements discussion and analysis of the financial condition and results of
operations of The Timberland Company and its subsidiaries (we, our, us, its, Timberland
or the Company), as well as our liquidity and capital resources. The discussion, including known
trends and uncertainties identified by management, should be read in conjunction with the Companys
unaudited condensed consolidated financial statements and related notes included in this Quarterly
Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2009.
Included herein are discussions and reconciliations of Total Company, Europe and Asia revenue
changes to constant dollar revenue changes. Constant dollar revenue changes, which exclude the
impact of changes in foreign exchange rates, are not Generally Accepted Accounting Principle
(GAAP) performance measures. The difference between changes in reported revenue (the most
comparable GAAP measure) and constant dollar revenue changes is the impact of foreign currency
exchange rate fluctuations. We calculate constant dollar revenue changes by recalculating current
year revenue
Form 10-Q
Page 23
using the prior years exchange rates and comparing it to the prior year
revenue reported on
a GAAP basis. We provide constant dollar revenue changes for Total Company, Europe and Asia
results because we use the measure to understand the underlying results and trends of the business
segments excluding the impact of exchange rate changes that are not under managements direct
control. The limitation of this measure is that it excludes exchange rate changes that have an
impact on the Companys revenue. This limitation is best addressed by using constant dollar
revenue changes in combination with the GAAP numbers. We have a foreign exchange rate risk
management program intended to minimize both the positive and negative effects of currency
fluctuations on our reported consolidated results of operations, financial position and cash
flows. The actions taken by us to mitigate foreign exchange risk are reflected in cost of goods
sold and other, net.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our
unaudited condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to sales
returns and allowances, realization of outstanding accounts receivable, the carrying value of
inventories, derivatives, other contingencies, impairment of assets, incentive compensation
accruals, share-based compensation and the provision for income taxes. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Historically, actual
results have not been materially different from our estimates. Because of the uncertainty inherent
in these matters, actual results could differ from the estimates used in, or that result from,
applying our critical accounting policies. Our significant accounting policies are described in
Note 1 to the Companys consolidated financial statements included in Part II, Item 8 of our Annual
Report on Form 10-K for the year ended December 31, 2009. Our estimates, assumptions and judgments
involved in applying the critical accounting policies are described in Part II, Item 7:
Managements Discussion and Analysis of Financial Condition and Results of Operations, of our
Annual Report on Form 10-K for the year ended December 31, 2009.
During
the quarter ended July 2, 2010, management concluded that the
carrying value of goodwill exceeded the estimated fair value for its
IPath, North America Retail and Europe Retail reporting units and,
accordingly, recorded an impairment charge of $5.4 million. Management
also concluded that the carrying value of the IPath and howies
trademarks and other intangible assets exceeded the estimated fair
value and, accordingly, recorded an impairment charge of $7.8
million. The Company's North America Wholesale and Europe Wholesale
business units have fair values substantially in excess of their
carrying value. See Notes 2 and 9 to the unaudited condensed
consolidated financial statements.
These non-recurring fair value measurements were developed using significant
unobservable inputs
(Level 3). For goodwill, the primary valuation technique used was the
discounted cash flow analysis based on the management's estimates of
forecasted cash flows for each business unit, with those cash flows
discounted to present value using rates proportionate with the risks
of those cash flows. In addition, management used a market-based
valuation method involving analysis of market multiples of revenues
and earnings before interest, taxes, depreciation and amortization
for a group of similar publicly traded companies and, if applicable,
recent transactions involving comparable companies. The Company
believes the blended use of these models balances the inherent risk
associated with either model if used on a stand-alone basis, and this
combination is indicative of the factors a market participant would
consider when performing a similar valuation. For trademark
intangible assets, management used the reflief-from-royalty method in
which fair value is the discounted value of forecasted royalty
revenue arising from a trademark using a royalty rate that an
independent third party would pay for use of that trademark.
Our
estimates of fair value are sensitive to changes in the assumptions
used in our valuation analysis and, as a result,
actual performance in the near and longer-term could be different from these expectations and
assumptions. These differences could be caused by events such as strategic decisions made in
response to economic and competitive conditions and the impact of economic factors on
Form 10-Q
Page 24
our customer
base. If our future actual results are significantly lower than our current operating results or
our estimates and assumptions used to calculate fair value are materially different, the value
determined using the discounted cash flow analysis could result in a lower value. A significant
decrease in value could result in a fair value lower than carrying value, which could result in
impairment of our remaining goodwill. While we believe we have made reasonable estimates and
assumptions used to calculate the fair value of the reporting units and other intangible assets, it is possible a
material change could occur, which may ultimately result in the recording of an additional non-cash
impairment charge.
These non-cash impairment charges do not have any direct impact on our liquidity,
compliance with
any covenants under our debt agreements or potential future results of operations. Our historical
operating results may not be indicative of our future operating results. We will revise our
estimates used in calculating the fair value of our reporting units as needed.
Overview
Our principal strategic goal is to become the authentic outdoor brand of choice
globally by
offering an integrated product selection that equips consumers to enjoy the experience of being in
the outdoors. We sell our products to consumers who embrace an outdoor-inspired lifestyle through
high-quality distribution channels, including our own retail stores, which reinforce the premium
positioning of the Timberlandâ
brand.
Our ongoing efforts to achieve this goal include (i) enhancing our
leadership position in our core
Timberland® footwear business through an increased focus on technological
innovation and
big idea initiatives like Earthkeepers, (ii) expanding our global apparel and accessories
business by leveraging the brands equity and initiatives through a combination of in-house
development and licensing arrangements with trusted partners, (iii) expanding our brands
geographically, (iv) driving operational and financial excellence, (v) setting the standard for
social and environmental responsibility and (vi) striving to be an employer of choice.
A summary of our second quarter of 2010 financial performance, compared to the
second quarter of
2009, follows:
|
|
|
Second quarter revenue increased 5.1%, or 5.8% on a constant dollar basis, to $189.0
million. |
|
|
|
|
Gross margin increased from 42.0% to 49.5%. |
|
|
|
|
Operating expenses were $126.8 million, an increase of 13.3% from $111.9 million in the
prior year period. Operating expenses for the second quarter of 2010 include impairment
charges of $13.2 million. |
|
|
|
|
We recorded an operating loss of $33.3 million in the second quarter of 2010, compared
to an operating loss of $36.4 million in the prior year period. Operating loss for the
second quarter of 2010 includes impairment charges of
$13.2 million. |
|
|
|
|
Net loss was $23.5 million in the second quarter of 2010, compared to $19.2 million in
the second quarter of 2009. |
|
|
|
|
Loss per share increased from $(.34) in the second quarter of 2009 to $(.44) in the
second quarter of 2010. |
|
|
|
|
Cash at the end of the quarter was $237.8 million with no debt outstanding. |
Results of Operations for the Quarter Ended July 2, 2010 as Compared
to the Quarter Ended July
3, 2009
Revenue
In the second quarter of 2010, our consolidated revenues grew 5.1% to
$189.0 million, reflecting
growth across North America, Europe and Asia. Double-digit growth in Italy and Central Europe was
partially offset by declines in the U.K. and France, while Taiwan and China continued to post
strong growth for the quarter, leading the favorable year over year comparison in Asia. On a
constant dollar basis, consolidated revenues increased 5.8%.
Form 10-Q
Page 25
Products
By product group, our footwear revenues increased 3.7% to $131.6 million
compared to the prior
year, and apparel and accessories revenues grew 10.2% to $52.1 million. Growth in footwear
revenues was driven primarily by improved wholesale revenue in North America, driven by Timberland
PRO® products, and Europe, driven by performance footwear. This growth was
partially
offset by a decrease in retail footwear sales in Europe and North America. The improvement in
apparel and accessories revenues compared to the prior year reflects revenue growth in North
America, driven by SmartWool® accessories, and in Asia, related to apparel
sales in our
own stores, partially offset by declines in our European apparel business. Royalty and other
revenue decreased 3.8% to $5.3 million compared to the prior year period primarily due to a decline
in licensed kids apparel in North America.
Channels
Wholesale revenue was $117.5 million in the second quarter of 2010, an 8.3%
increase compared to
the prior year quarter, driven primarily by double-digit growth in North America and Europe which
was partially offset by double-digit declines in Asia.
Retail revenues were up slightly at $71.5 million in the second quarter of
2010, driven by growth
in Asia which was partially offset by declines in Europe and North America. Comparable store sales
were relatively flat compared to the second quarter of 2009 as growth in specialty and outlet
stores across Asia was offset by declines in both Europe and North America. We had 224 and 220
Company-owned stores, shops and outlets worldwide at the end of the second quarters of 2010 and
2009, respectively.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 49.5% for the second
quarter of 2010, a
750 basis point improvement compared to the second quarter of 2009. We saw gross margin
improvement for the quarter in all regions, driven by lower product costs, declines in global
close-out revenue, reduced provisions for inventory and sales returns, and favorable region and
channel mix. While the benefits from mix and lower product costs continued in the second quarter,
we believe that increased product costs as a result of higher leather, transportation and labor
costs could adversely impact gross margin in the second half of 2010.
We include the costs of procuring inventory (inbound freight and duty, overhead
and other similar
costs) in cost of goods sold. These costs amounted to $14.9 million and $11.7 million for the
second quarters of 2010 and 2009, respectively. The increase is principally the result of freight
cost unfavorability quarter over quarter, partially offset by reduced logistics and apparel
sourcing costs.
Operating Expense
Operating expense for the second quarter of 2010 was $126.8 million, an
increase of $14.9 million,
or 13.3%, when compared to the second quarter of 2009. Foreign exchange rate impacts were not
material in the second quarter of 2010. The increase in operating expense was driven by a charge
for impairment of goodwill and intangible assets of $13.2 million, an increase in general and
administrative expense of $2.0 million and an increase in selling expense of $1.1 million. These
increases were partially offset by a $1.5 million gain in the second quarter of 2010 related to the
termination of a licensing agreement.
Selling expense was $86.1 million in the second quarter of 2010, an increase
of 1.3% over the same
period in 2009. Selling expense reflects higher incentive compensation costs and selling related
expenses, partially offset by a decline in other employee compensation and store related costs.
We include the costs of physically managing inventory (warehousing and handling
costs) in selling
expense. These costs totaled $7.1 million and $8.0 million in the second quarters of 2010 and
2009, respectively.
In the second quarters of 2010 and 2009, we recorded $0.5 million and
$0.3 million, respectively,
of reimbursed shipping expenses within revenues and the related shipping costs within selling
expense. Shipping costs are included in selling expense and were $2.8 million and $1.5 million for
the quarters ended July 2, 2010 and July 3, 2009, respectively.
Form 10-Q
Page 26
Advertising expense, which is included in selling expense, was $5.5 million
and $5.6 million in
the second quarters of 2010 and 2009, respectively. A decrease in television and other media
campaigns was partially offset by continued investment in out of home, Internet and digital media
initiatives, as well as co-op advertising. Advertising expense includes co-op advertising costs,
consumer-facing advertising costs such as print, television and Internet campaigns, production
costs including agency fees, and catalog costs. Advertising costs are expensed at the time the
advertising is used, predominantly in the season that the advertising costs are incurred. Prepaid
advertising recorded on our unaudited condensed consolidated balance sheets as of July 2, 2010 and
July 3, 2009 was $2.2 million and $2.3 million, respectively.
General and administrative expense for the second quarter of 2010 was
$28.9 million, an increase of
7.6% compared to the $26.9 million reported in the second quarter of 2009, driven by increases in
share-based and incentive compensation.
Total operating expense in the second quarter of 2010 also included an impairment
charge of $7.8
million related to certain intangible assets, an impairment charge of $5.4 million related to
goodwill, and a gain of $1.5 million associated with the termination of a licensing agreement. Of
the total $13.2 million in impairment charges recorded in the second quarter of 2010, approximately
$12.0 million relates to IPath and howies. See Note 2 to the unaudited condensed consolidated
financial statements.
Operating Income/(Loss)
We recorded an operating loss of $33.3 million in the second quarter of
2010, compared to an
operating loss of $36.4 million in the prior year period. Operating loss included impairment
charges of $13.2 million and a gain of $1.5 million associated with the termination of a licensing
agreement in the second quarter of 2010.
Other Income/(Expense) and Taxes
Interest income was $0.1 million and $0.3 million in the second
quarters of 2010 and 2009,
respectively, reflecting lower interest rates. Interest expense, which is comprised of fees
related to the establishment and maintenance of our revolving credit facility and bank guarantees,
and interest paid on short-term borrowings, was $0.1 million in each of the second quarters of 2010
and 2009.
Other, net, included foreign exchange gains of $1.0 million and
$0.7 million in the second quarters of 2010 and 2009, respectively, resulting from changes in the fair value of financial
derivatives, specifically forward contracts not designated as cash flow hedges, and the currency
gains and losses incurred on the settlement of local currency denominated receivables and payables.
These results were driven by the volatility of exchange rates within the second quarters of 2010
and 2009 and should not be considered indicative of expected future results.
The effective income tax rate for the second quarter of 2010 was 29.0%. The
Company anticipates
that its effective tax rate for 2010 will be lower than its overall statutory rate of 39%. The
effective income tax rate for the second quarter of 2009 was 44.3%.
In December 2009, we received a Notice of Assessment from the Internal
Revenue Department of Hong
Kong for approximately $17.6 million with respect to the tax years 2004 through 2008. In
connection with the assessment, the Company made required payments to the Internal Revenue
Department of Hong Kong totaling approximately $7.5 million in the second quarter of 2010. We
believe we have a sound defense to the proposed adjustment and will continue to firmly oppose the
assessment. We believe that the assessment does not impact the level of liabilities for our income
tax contingencies. However, actual resolution may differ from our current estimates, and such
differences could have a material impact on our future effective tax rate and our results of
operations.
Segments Review
We have three reportable business segments (see Note 7 to the unaudited condensed
consolidated
financial statements contained herein for additional information): North America, Europe and Asia.
Beginning in the first quarter of 2010, certain U.S. distribution expenses and short-term incentive
compensation costs previously reported in Unallocated Corporate were reclassified to North America,
Europe and Asia to conform to the current period presentation. Additionally, certain distributor
Form 10-Q
Page 27
revenue and operating income reflected in our Europe segment in prior periods has
been reclassified
to Asia to conform to the current period presentation.
Revenue by segment for the quarter ended July 2, 2010 compared to the
quarter ended July 3, 2009 is
as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
July 2, |
|
|
July 3, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
|
North America |
|
|
$ 92.0 |
|
|
|
$ 86.3 |
|
|
|
6.6% |
|
Europe |
|
|
66.8 |
|
|
|
65.8 |
|
|
|
1.4 |
|
Asia |
|
|
30.2 |
|
|
|
27.6 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$189.0 |
|
|
|
$179.7 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) by segment and as a percentage of revenue for the
quarters ended July 2,
2010 and July 3, 2009 are included in the table below (dollars in millions). Segment operating
income/(loss) is presented as a percentage of its respective segment revenue. Unallocated
Corporate expenses are presented as a percentage of total revenue. North America and Europe
include impairment charges of $8.1 million and $5.1 million, respectively, in the quarter ended
July 2, 2010. Additionally, North America includes a gain of $1.5 million related to the
termination of a licensing agreement in the quarter ended July 2, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
|
July 2, |
|
|
|
|
|
July 3, |
|
|
|
|
|
|
2010 |
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
North America |
|
$ |
2.9 |
|
|
|
3.2 |
% |
|
$ |
1.2 |
|
|
|
1.4 |
% |
Europe |
|
|
(11.8 |
) |
|
|
(17.7 |
) |
|
|
(10.6 |
) |
|
|
(16.1 |
) |
Asia |
|
|
2.6 |
|
|
|
8.7 |
|
|
|
(0.7 |
) |
|
|
(2.5 |
) |
Unallocated Corporate |
|
|
(27.0 |
) |
|
|
(14.3 |
) |
|
|
(26.3 |
) |
|
|
(14.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(33.3 |
) |
|
|
(17.6 |
) |
|
$ |
(36.4 |
) |
|
|
(20.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
North America revenues were $92.0 million in the second quarter of 2010, an
increase of 6.6% as
compared to the same period in 2009. Growth in apparel and accessories and double-digit growth in
our Timberland PRO® footwear line was partially offset by declines in other
footwear.
Within North America, our retail business had a decline in revenue of 2.5%, driven by a 3.9%
decrease in comparable store sales. Growth in our specialty stores was offset by declines in our
outlets. We had 66 stores at July 2, 2010 compared to 70 stores at July 3, 2009. Store declines
were partially offset by strong growth in our e-commerce business.
Operating income for our North America segment was $2.9 million, compared to
$1.2 million for the
second quarter of 2009. The increase was driven by an 815 basis point improvement in gross margin,
due primarily to favorable product mix, reduced product costs, less promotional activity in retail,
and lower provisions for inventory and sales returns and allowances. Operating expense increased
25.3% driven by impairment charges of $8.1 million principally associated with our IPath reporting
unit, partially offset by a gain of $1.5 million associated with the termination of a licensing
agreement.
Form 10-Q
Page 28
Europe
Europe recorded revenues of $66.8 million in the second quarter of 2010, a
1.4% increase from the
second quarter of 2009, and an increase of 5.7% on a constant dollar basis. Double-digit growth
across Italy, Central Europe and Scandinavia, was offset by declines in the UK and France and
unfavorable foreign exchange rate impacts. Strong growth in footwear through the wholesale channel
was partially offset by weakness in the retail channels, which was driven by lower footwear sales.
Retail revenue fell 10.4%, driven by comparable store sales declines of 4.3% and unfavorable
foreign exchange rate impacts. We had 63 stores at both July 2, 2010 and July 3, 2009.
Timberlands European segment recorded an operating loss of
$11.8 million in the second quarter of
2010, compared to an operating loss of $10.6 million in the second quarter of 2009. A 165 basis
point increase in gross margin resulted from improved profitability on close-outs, lower sales
returns and allowances and lower product costs, partially offset by unfavorable foreign exchange
rate impacts and product mix. The increase in gross margin was more than offset by a 6.7% increase
in operating expenses, driven by an impairment charge of $5.1 million associated principally with
our howies and IPath trademarks, partially offset by favorable foreign exchange impacts.
Asia
In Asia, revenues increased 9.6%, or 4.8% in constant dollars, to
$30.2 million in the second
quarter of 2010 due to continued strong growth in Taiwan, due in part to the impact of new retail
stores, and China. Retail revenues were up 23.2%, driven by strong apparel sales and favorable
foreign exchange rate impacts. Comparable store sales grew 11.4%, and we added eight new stores
year over year. We had 95 stores at July 2, 2010 compared to 87 stores at July 3, 2009.
We had operating income in our Asia segment of $2.6 million for the second
quarter of 2010,
compared to an operating loss of $0.7 million for the second quarter of 2009, driven by a 950 basis
point improvement in gross margin, reflecting favorable foreign exchange rate impacts, lower levels
of sales returns and allowances and favorable mix impacts. This improvement was partially offset
by an increase in operating expenses of 6.3% due to unfavorable foreign exchange impacts, as well
as higher employee and store related costs.
Corporate Unallocated
Our Unallocated Corporate expenses, which include central support and
administrative costs not
allocated to our business segments, increased 2.7% to $27.0 million, which reflects higher
incentive compensation costs and consulting costs associated with technology initiatives partially
offset by favorability in certain supply chain costs which are not allocated to our reported
segments.
Results of Operations for the Six Months Ended July 2, 2010 as
Compared to the Six Months Ended July 3, 2009
Revenue
In the first six months of 2010, our consolidated revenues grew 6.2% to
$506.0 million, reflecting
growth across North America, Europe and Asia and favorable foreign exchange rate impacts. Nearly
every market in Europe and Asia delivered top-line growth for the first six months of 2010 compared
to the prior year period. Double-digit growth in Italy, Germany, Scandinavia and Spain, as well as
strong growth in the UK, were partially offset by declines in our European distributor business.
Revenue in China more than doubled in the first six months and Taiwan posted double-digit growth
for the first six months, leading the favorable year over year improvement in Asia. On a constant
dollar basis, consolidated revenues increased 4.2%.
Products
By product group, our footwear revenues increased 5.5% to $357.1 million
compared to the prior year
and apparel and accessories revenues grew 9.4% to $137.8 million. Growth in footwear revenues was
driven primarily by improved wholesale revenue in Europe and North America and benefits from
foreign exchange. Footwear revenue growth in North America was driven by double-digit growth in
our Timberland PRO® and performance lines, partially offset by declines in
other
footwear. The improvement in apparel and accessories revenues compared to the prior year reflects
revenue growth in North America and Asia related to sales of apparel and accessories in our own
stores and through our wholesale partners,
Form 10-Q
Page 29
partially offset by declines in our European wholesale
apparel business. Royalty and other revenue decreased 6.4% to $11.1 million compared to the prior
year period, primarily due to a decline in licensed kids apparel in Europe.
Channels
Wholesale revenue was $349.4 million in the first six months of 2010, a 6.8%
increase compared to
the first six months of 2009, driven primarily by growth across all regions and favorable foreign
exchange rate impacts. During the first six months of 2010, we saw solid performance in North
America and Europe, as well as double-digit growth in Asia.
Retail revenues grew 4.9% to $156.6 million in the first six months of 2010,
driven by favorable
foreign exchange rate impacts, comparable store sales growth and the net addition of 4 stores.
Comparable store sales were up 2.1% compared to the first six months of 2009, with growth in our
specialty and outlet stores across Europe and Asia, and our specialty stores in North America.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 49.7% for the first
six months of 2010,
a 520 basis point improvement compared to the first six months of 2009. Gross margin improved for
the first half of the year across all regions, and was driven by favorable mix impacts, better pricing, in part
due to less promotional activity in retail, lower product costs and reduced provisions for
inventory and sales returns. While the Company expects the benefits from product mix to continue,
it believes that increased product costs as a result of higher leather, transportation and labor
costs could adversely impact gross margin in the second half of 2010.
We include the costs of procuring inventory (inbound freight and duty, overhead
and other similar
costs) in cost of goods sold. These costs amounted to $25.8 million and $25.6 million for the first
six months of 2010 and 2009, respectively. The increase is principally the result of freight cost
unfavorability, partially offset by reduced logistics and apparel sourcing costs.
Operating Expense
Operating expense for the first six months of 2010 was $245.4 million, an
increase of $15.0
million, or 6.5%, when compared to the first six months of 2009. Foreign exchange rate impacts
were not material in the first six months of 2010. The change in operating expense was driven by
increases of $12.3 million in impairment charges, $4.0 million in general and administrative
expenses and $1.5 million in selling expense. These increases were partially offset by a $3.0
million gain related to the termination of licensing agreements during the first six months of
2010.
Selling expense was $178.8 million in the first six months of 2010, an
increase of less than 1%
over the same period in 2009. Selling expense reflects decreased advertising spend and fixed asset
write-offs compared to the prior year period offset by increased selling related expenses and
higher incentive compensation costs.
We include the costs of physically managing inventory (warehousing and handling
costs) in selling
expense. These costs totaled $15.4 million and $17.4 million in the first six months of 2010 and
2009, respectively.
In the first six months of 2010 and 2009, we recorded $1.1 million and
$0.9 million, respectively,
of reimbursed shipping expenses within revenues and the related shipping costs within selling
expense. Shipping costs are included in selling expense and were $8.0 million and $6.3 million for
the six months ended July 2, 2010 and July 3, 2009, respectively.
Advertising expense, which is included in selling expense, was $9.3 million
and $10.2 million in
the first six months of 2010 and 2009, respectively. A decrease in television campaigns, as well
as the associated productions costs, was partially offset by continued investment in Internet and
other initiatives, as well as co-op advertising. Advertising expense includes co-op advertising
costs, consumer-facing advertising costs such as print, television and Internet campaigns,
production costs including agency fees, and catalog costs.
General and administrative expense for the first six months of 2010 was
$56.3 million, an increase
of 7.7% compared to the $52.3 million reported in the first six months of 2009, driven by increases
in incentive compensation and other employee related costs of $4.1 million, partially offset by
reductions in discretionary spending.
Form 10-Q
Page 30
Total operating expense in the first six months of 2010 also includes an
impairment charge of $7.8
million related to certain intangible assets, an impairment charge of $5.4 million related to
goodwill, and a gain of $3.0 million associated with the termination of licensing agreements.
Total operating expense in the first six months of 2009 included a charge of $0.9 million for the
impairment of a trademark, and restructuring credits of $0.1 million.
Operating Income/(Loss)
We recorded operating income of $6.1 million in the first six months of
2010, compared to an
operating loss of $18.2 million in the prior year period. The improvement year over year was
driven by solid revenue growth and a 520 basis point improvement in gross margin. Operating income
in the first six months of 2010 included a goodwill and intangible asset impairment charge of $13.2
million and gains on termination of licensing agreements of $3.0 million, compared to a $0.9
million intangible asset impairment charge and restructuring credits of $0.1 million included in
operating loss in the first six months of 2009.
Other Income/(Expense) and Taxes
Interest income was $0.2 million and $0.7 million in the first six
months of 2010 and 2009,
respectively, reflecting lower interest rates. Interest expense, which is comprised of fees
related to the establishment and maintenance of our revolving credit facility and bank guarantees,
and interest paid on short-term borrowings, was $0.3 million and $0.2 million in the first six
months of 2010 and 2009, respectively.
Other, net, included foreign exchange gains of $0.5 million and
$0.4 million in the first six
months of 2010 and 2009, respectively, resulting from changes in the fair value of financial
derivatives, specifically forward contracts not designated as cash flow hedges, and the currency
gains and losses incurred on the settlement of local currency denominated receivables and payables.
These results were driven by the volatility of exchange rates within the first six months of 2010
and 2009 and should not be considered indicative of expected future results.
The effective income tax rate for the first six months of 2010 was 62.7%. The
Company anticipates
that its effective tax rate for 2010 will be lower than its overall statutory rate of 39%. The
effective income tax rate for the first six months of 2009 was 79.9%. The rate in 2009 was
impacted by the release of approximately $6.5 million in specific tax reserves due to the closure
of certain audits in the first six months of 2009 and the geographic mix of our profits.
In December 2009, we received a Notice of Assessment from the Internal
Revenue Department of Hong
Kong for approximately $17.6 million with respect to the tax years 2004 through 2008. In
connection with the assessment, the Company made required payments to the Internal Revenue
Department of Hong Kong totaling approximately $8.4 million in the first six months of 2010. We
believe we have a sound defense to the proposed adjustment and will continue to firmly oppose the
assessment. We believe that the assessment does not impact the level of liabilities for our income
tax contingencies. However, actual resolution may differ from our current estimates, and such
differences could have a material impact on our future effective tax rate and our results of
operations.
Segments Review
Revenue by segment for the six months ended July 2, 2010 compared to the six
months ended July 3,
2009 is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
July 2, |
|
July 3, |
|
|
|
|
2010 |
|
2009 |
|
% Change |
|
|
|
North America |
|
$ |
213.9 |
|
|
$ |
206.2 |
|
|
|
3.7 |
% |
Europe |
|
|
218.4 |
|
|
|
205.4 |
|
|
|
6.3 |
|
Asia |
|
|
73.7 |
|
|
|
64.8 |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
506.0 |
|
|
$ |
476.4 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) by segment and as a percentage of revenue for the six
months ended July 2,
2010 and July 3, 2009 are included in the table below (dollars in millions). Segment operating
income is presented as a percentage of its respective segment revenue. Unallocated Corporate
expenses are presented as a percentage of total revenue. North America
Form 10-Q
Page 31
includes impairment charges
of $8.1 million and a gain related to the termination of licensing agreements of $3.0 million in
the six months ended July 2, 2010. Europe includes impairment charges of $5.1 million and $0.9
million in the six months ended July 2, 2010 and July 3, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
July 2, |
|
|
|
|
|
July 3, |
|
|
|
|
|
|
2010 |
|
|
|
|
|
2009 |
|
|
|
|
North America |
|
|
$24.6 |
|
|
|
11.5 |
% |
|
$ |
10.8 |
|
|
|
5.2 |
% |
Europe |
|
|
25.4 |
|
|
|
11.7 |
|
|
|
19.2 |
|
|
|
9.4 |
|
Asia |
|
|
9.5 |
|
|
|
12.8 |
|
|
|
1.2 |
|
|
|
1.9 |
|
Unallocated Corporate |
|
|
(53.4 |
) |
|
|
(10.6 |
) |
|
|
(49.4 |
) |
|
|
(10.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 6.1 |
|
|
|
1.2 |
|
|
$ |
(18.2 |
) |
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
North America revenues were $213.9 million in the first six months of 2010,
an increase of 3.7% as
compared to the same period in 2009. Growth in apparel and accessories and double-digit growth in
our Timberland PRO® and performance footwear lines was partially offset by
declines in
other footwear. Within North America, our retail business grew 1.2%, driven by growth in our
e-commerce business, as comparable store sales were flat.
Operating income for our North America segment was $24.6 million, compared
to $10.8 million for the
first six months of 2009. The increase was driven by an 800 basis point improvement in gross
margin, due primarily to favorable product mix, reduced product costs, less promotional activity in
retail, and lower provisions for inventory and sales returns and allowances. Operating expenses
increased 9.2% reflecting goodwill and intangible asset impairment charges of $8.1 million,
primarily related to IPath, and increases in certain marketing initiatives and selling related
costs. These items were partially offset by a gain of $3.0 million associated with the termination
of licensing agreements and a reduction of $0.7 million associated with fixed asset write-offs
taken in 2009 related to our e-commerce business and underperforming retail stores.
Europe
Europe recorded revenues of $218.4 million in the first six months of 2010,
which was a 6.3%
increase from the first six months of 2009, and an increase of 3.6% on a constant dollar basis.
Growth across our major markets in Europe, in particular Italy,
Germany and the UK, was partially
offset by weakness in certain distributor markets, such as Greece, Turkey and the Middle East.
Both wholesale and retail channels showed growth in footwear with the majority coming from the
wholesale channel. Strength in retail apparel sales was offset by apparel revenue declines in the
wholesale channel. Retail growth of 4.1% was driven by comparable store sales growth of almost 1%
and favorable foreign exchange rate impacts.
Timberlands European segment recorded operating income of
$25.4 million in the first six months of
2010, compared to operating income of $19.2 million in the first six months of 2009. Improvement
in Europe was driven by a 180 basis point increase in gross margin from favorable product and
channel mix, as well as lower product costs. The increase in margin was partially offset by a 5.1%
increase in operating expenses, due principally to the impact of a $5.1 million impairment charge
related primarily to our howies and IPath trademarks. Operating expense for the 2009 period
included a charge of $0.9 million for the impairment of the GoLite trademark. In addition, Europe
incurred higher employee related costs, which
were partially offset by reduced discretionary spending.
Asia
In Asia, revenues increased 13.8%, or 9.3% in constant dollars, to
$73.7 million in the first six
months of 2010 due to strong growth in footwear and apparel in both wholesale and retail channels.
Retail revenues were up 12.0%, driven by comparable store sales growth of 8.0%, the addition of 8
stores, and favorable foreign exchange rate impacts.
We had operating income in our Asia segment of $9.5 million for the first
six months of 2010,
compared to operating income of $1.2 million for the first six months of 2009, driven by a 460
basis point improvement in gross margin, reflecting favorable foreign exchange rate impacts and
lower levels of sales returns and allowances.
Form 10-Q
Page 32
Corporate Unallocated
Our Unallocated Corporate expenses, which include central support and
administrative costs not
allocated to our business segments, increased 8.1% to $53.4 million in the first six months of
2010, which reflects higher incentive compensation and other employee related costs partially
offset by decreased advertising costs.
Reconciliation of Total Company, Europe and Asia Revenue
Increases/(Decreases) To Constant
Dollar Revenue Increases/(Decreases)
Total Company Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
For the Six Months |
|
|
Ended July 2, 2010 |
|
Ended July 2, 2010 |
|
|
$ Millions |
|
|
|
|
|
$ Millions |
|
|
|
|
Change |
|
% Change |
|
Change |
|
% Change |
|
|
|
|
|
Revenue increase (GAAP) |
|
$ |
9.3 |
|
|
|
5.1 |
% |
|
$ |
29.6 |
|
|
|
6.2 |
% |
(Decrease)/increase due to foreign exchange rate changes |
|
|
(1.1 |
) |
|
|
-0.7 |
% |
|
|
9.6 |
|
|
|
2.0 |
% |
|
|
|
|
|
Revenue increase in constant dollars |
|
$ |
10.4 |
|
|
|
5.8 |
% |
|
$ |
20.0 |
|
|
|
4.2 |
% |
Europe Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
For the Six Months |
|
|
Ended July 2, 2010 |
|
Ended July 2, 2010 |
|
|
$ Millions |
|
|
|
|
|
$ Millions |
|
|
|
|
Change |
|
% Change |
|
Change |
|
% Change |
|
|
|
|
|
Revenue increase (GAAP) |
|
|
$0.9 |
|
|
|
1.4 |
% |
|
|
$13.0 |
|
|
|
6.3 |
% |
(Decrease)/increase due to foreign exchange rate changes |
|
|
(2.9 |
) |
|
|
-4.3 |
% |
|
|
5.5 |
|
|
|
2.7 |
% |
|
|
|
|
|
Revenue increase in constant dollars |
|
|
$3.8 |
|
|
|
5.7 |
% |
|
|
$7.5 |
|
|
|
3.6 |
% |
|
|
|
|
|
Asia Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
For the Six Months |
|
|
Ended July 2, 2010 |
|
Ended July 2, 2010 |
|
|
$ Millions |
|
|
|
|
|
$ Millions |
|
|
|
|
Change |
|
% Change |
|
Change |
|
% Change |
|
|
|
|
|
Revenue increase (GAAP) |
|
$ |
2.6 |
|
|
|
9.6 |
% |
|
$ |
8.9 |
|
|
|
13.8 |
% |
Increase due to foreign exchange rate changes |
|
|
1.3 |
|
|
|
4.8 |
% |
|
|
2.9 |
|
|
|
4.5 |
% |
|
|
|
|
|
Revenue increase in constant dollars |
|
$ |
1.3 |
|
|
|
4.8 |
% |
|
$ |
6.0 |
|
|
|
9.3 |
% |
The difference between changes in reported revenue (the most comparable GAAP
measure) and constant
dollar revenue changes is the impact of foreign currency. We calculate constant dollar revenue
changes by recalculating current year revenue using the prior years exchange rates and comparing
it to the prior year revenue reported on a GAAP basis. We provide constant dollar revenue changes
for Total Company, Europe and Asia results because we use the measure to understand the underlying
results and trends of the business segments excluding the impact of exchange rate changes that are
not under managements direct control. We have a foreign exchange rate risk management program
intended to minimize both the positive and negative effects of currency fluctuations on our
reported consolidated results of operations, financial position and cash flows. The actions taken
by us to mitigate foreign exchange risk are reflected in cost of goods sold and other, net.
Accounts Receivable and Inventory
Accounts receivable were $86.8 million at July 2, 2010, compared with
$149.2 million as of December
31, 2009 and $100.1
million as of July 3, 2009. Days sales outstanding were 41 days as of July 2, 2010, compared with
35 days as of December 31, 2009 and 50 days as of July 3, 2009. Wholesale days sales outstanding
were 55 days for the second quarter of 2010, 45 days at December 31, 2009 and 66 days for the
second quarter of 2009. The decrease in accounts receivable was driven by a shift in the pattern
of revenue to earlier in the quarter, and maintaining our collection discipline despite the
macro-economic environment.
Form 10-Q
Page 33
Inventory was $177.2 million as of July 2, 2010, compared with
$158.5 million at December 31, 2009
and $180.4 million as of July 3, 2009. The reduction in inventory is driven by improved planning,
resulting in less excess and obsolete inventory.
Liquidity and Capital Resources
Net cash
provided by operations for the first half of 2010 was $1.0 million,
compared with cash
used of $6.6 million for the first half of 2009. The increase in cash generation was due primarily
to the improvement in our profitability.
Net cash used for investing activities was $7.4 million in the first half of
2010, compared with
$9.7 million in the first half of 2009. Cash used in the first half of 2009 included approximately
$1.5 million for the acquisition of Glaudio.
Net cash
used by financing activities was $41.8 million in the first half of
2010, compared with
$18.1 million in the first half of 2009. Cash flows used for financing activities reflect share
repurchases of $44.2 million in the first six months of 2010, compared with $19.4 million in the
first six months of 2009. We received cash inflows of $2.4 million in the first half of 2010 from
the exercise of employee stock options, compared with $1.4 million from such exercises in the first
half of 2009.
We are exposed to the credit risk of those parties with which we do business
including
counterparties on our derivative contracts and our customers. Derivative instruments expose us to
credit and market risk. The market risk associated with these instruments resulting from currency
exchange movements is expected to offset the market risk of the underlying transactions being
hedged. We do not believe there is a significant risk of loss in the event of non-performance by
the counterparties associated with these instruments because these transactions are executed with a
group of major financial institutions and have varying maturities through April 2011. As a matter
of policy, we enter into these contracts only with counterparties having a minimum investment-grade
or better credit rating. Credit risk is managed through the continuous monitoring of exposures to
such counterparties.
Additionally, consumer spending continues to be affected by the current
macro-economic environment,
particularly the disruption of the credit and stock markets and high unemployment. Continued
deterioration, or lack of improvement, in the markets and economic conditions generally could
adversely impact our customers and their ability to access credit.
We may utilize our committed and uncommitted lines of credit to fund our seasonal
working capital
needs. We have not experienced any restrictions on the availability of these lines and the adverse
capital and credit market conditions are not expected to significantly affect our ability to meet
our liquidity needs.
We have an unsecured committed revolving credit agreement with a group of banks,
which matures on
June 2, 2011 (Agreement). The Agreement provides for $200 million of committed borrowings, of
which up to $125 million may be used for letters of credit. Any letters of credit outstanding
under the Agreement ($1.8 million at July 2, 2010) reduce the amount available for borrowing under
the Agreement. Upon approval of the bank group, we may increase the committed borrowing limit by
$100 million for a total commitment of $300 million. Under the terms of the Agreement, we may
borrow at interest rates based on Eurodollar rates (approximately 0.5% at July 2, 2010), plus an
applicable margin based on a fixed-charge coverage grid of between 13.5 and 47.5 basis points that
is adjusted quarterly. As of July 2, 2010, the applicable margin under the facility was 47.5 basis
points. We pay a utilization fee of an additional 5 basis points if our outstanding borrowings
under the facility exceed $100 million. We also pay a commitment fee of 6.5 to 15 basis points per
annum on the total commitment, based on a fixed-charge coverage grid that is adjusted quarterly.
As of July 2, 2010, the commitment fee was 15 basis points. The Agreement places certain
limitations on additional debt, stock repurchases, acquisitions, and the amount of dividends we may
pay, and includes certain other financial and non-financial covenants. The primary financial
covenants relate to maintaining a minimum fixed-charge coverage ratio of 2.25:1 and a maximum
leverage ratio of 2:1. We measure compliance with the financial and non-financial covenants and
ratios as required by the terms of the Agreement on a fiscal quarter basis.
We have uncommitted lines of credit available from certain banks which totaled
$30 million at July
2, 2010. Any borrowings under these lines would be at prevailing money market rates. Further, we
have an uncommitted letter of credit facility of $80 million to support inventory purchases. These
arrangements may be terminated at any time at the option of the banks or at our option.
Form 10-Q
Page 34
As of July 2, 2010 and July 3, 2009, we had no borrowings outstanding
under any of our credit facilities.
Management believes that our operating costs, capital requirements and funding
for our share
repurchase program for the balance of 2010 will be funded through our current cash balances, our
existing credit facilities (which place certain limitations on additional debt, stock repurchases,
acquisitions and on the amount of dividends we may pay, and also contain certain other financial
and operating covenants) and cash from operations, without the need for additional financing.
However, as discussed in the sections entitled Cautionary Statements for Purposes of the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and Forward Looking
Information on page 2 of this Quarterly Report on Form 10-Q and in Part II, Item 1A, Risk Factors,
of this Quarterly Report on Form 10-Q, several risks and uncertainties could require that the
Company raise additional capital through equity and/or debt financing. From time to time, the
Company considers acquisition opportunities which, if pursued, could also result in the need for
additional financing. However, if the need arises, our ability to obtain any additional financing
will depend upon prevailing market conditions, our financial condition and the terms and conditions
of such financing. The continued volatility in the credit markets could result in significant
increases in borrowing costs for any new debt we may require.
Off-Balance Sheet Arrangements
Letters of Credit
As of July 2, 2010, December 31, 2009 and July 3, 2009, we had
letters of credit outstanding of
$15.9 million, $16.6 million and $17.2 million, respectively. These letters of credit were issued
principally in support of real estate commitments.
We use funds from operations and unsecured committed and uncommitted lines of
credit as the primary
sources of financing for our seasonal and other working capital requirements. Our principal risks
related to these sources of financing are the impact on our financial condition from economic
downturns, a decrease in the demand for our products, increases in the prices of materials and a
variety of other factors.
New Accounting Pronouncements
A discussion of new accounting pronouncements, none of which had a material
impact on our
operations, financial condition or liquidity, is included in Note 1 to the unaudited condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our financial position and results of
operations are routinely
subject to a variety of risks, including market risk associated with interest rate movements on
borrowings and investments and currency rate movements on non-U.S. dollar denominated assets,
liabilities and cash flows. We regularly assess these risks and have established policies and
business practices that should mitigate a portion of the adverse effect of these and other
potential exposures.
We utilize cash from operations and U.S. dollar denominated borrowings to fund
our working capital
and investment needs. Short-term debt, if required, is used to meet working capital requirements
and long-term debt, if required, is generally used to finance long-term investments. In addition,
we use derivative instruments to manage the impact of foreign currency fluctuations on a portion of
our foreign currency transactions. These derivative instruments are viewed as risk management
tools and are not used for trading or speculative purposes. Cash balances are invested in
high-grade securities with terms of less than three months.
We have available unsecured committed and uncommitted lines of credit as sources
of financing for
our working capital requirements. Borrowings under these credit agreements bear interest at
variable rates based on either lenders cost of funds, plus an applicable spread, or prevailing
money market rates. As of July 2, 2010 and July 3, 2009, we had no short-term or long-term debt
outstanding.
Our foreign currency exposure is generated primarily from our European operating
subsidiaries and,
to a lesser degree, our Asian and Canadian operating subsidiaries. We seek to mitigate the impact
of these foreign currency fluctuations through a risk management program that includes the use of
derivative financial instruments, primarily foreign currency forward contracts. These derivative
instruments are carried at fair value on our balance sheet. The Company has implemented a program
that qualifies for hedge accounting treatment to aid in mitigating our foreign currency exposures
and decreasing the volatility of our earnings. The foreign currency forward contracts under this
program will expire in 10 months or less. Based upon a sensitivity analysis as of July
2, 2010, a 10% change in foreign exchange rates would cause the fair value of our
Form 10-Q
Page 35
derivative instruments to increase/decrease by approximately $9.4 million, compared to an increase/decrease of
$12.2 million at December 31, 2009 and an increase/decrease of $11.4 million at July 3, 2009.
Item 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures which are designed to
ensure that
information required to be
disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 (the
Exchange Act) is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. These disclosure controls and
procedures include controls and procedures designed to ensure that information required to be
disclosed under the federal securities laws is accumulated and communicated to our management on a
timely basis to allow decisions regarding required disclosure.
Based on their evaluation, our principal executive officer and principal
financial officer have
concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, were effective as of the end of the period covered by this report.
There were no changes in our internal control over financial reporting, as
defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended July 2, 2010
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Part
II - OTHER INFORMATION
Item 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form
10-Q, you
should carefully consider the factors discussed in the section entitled Cautionary Statements for
Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
on page 2 of our Annual Report on Form 10-K for the year ended December 31, 2009 (our Annual
Report on Form 10-K), in the section entitled Risk Factors in Part I, Item 1A of our Annual
Report on Form 10-K, and in the section entitled Risk Factors in Part II, Item 1A of any
Quarterly Report on Form 10-Q filed subsequent to our Annual Report on Form 10-K, which could
materially affect our business, financial condition or future results. The risks described in this
Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K, and in any Quarterly Report on
Form 10-Q filed subsequent to our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial condition or future
results.
Form 10-Q
Page 36
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES(1)
For the Three Fiscal Months Ended July 2, 2010
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Total Number |
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Maximum Number |
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of Shares |
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of Shares |
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Purchased as Part |
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That May Yet |
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Total Number |
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of Publicly |
|
Be Purchased |
|
|
of Shares |
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Average Price |
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Announced |
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Under the Plans |
Period* |
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Purchased ** |
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Paid per Share |
|
Plans or Programs |
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or Programs |
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April 3 April 30 |
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- |
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$ |
- |
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- |
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|
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6,301,866 |
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May 1 May 28 |
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|
477,413 |
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|
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20.54 |
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|
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477,413 |
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|
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5,824,453 |
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May 29 July 2 |
|
|
847,220 |
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|
|
17.97 |
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847,220 |
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4,977,233 |
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Q2 Total |
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1,324,633 |
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$ |
18.90 |
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1,324,633 |
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Footnote (1)
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Approved |
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|
|
Announcement |
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Program |
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Expiration |
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Date |
|
Size (Shares) |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
Program 1 |
|
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03/10/2008 |
|
|
|
6,000,000 |
|
|
None |
Program 2 |
|
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12/09/2009 |
|
|
|
6,000,000 |
|
|
None |
During the quarter ended July 2, 2010, 301,866 shares were repurchased under
Program 1, which brought the total
repurchased under the program to 6,000,000 shares. On December 3, 2009, our Board of Directors approved the
repurchase of up to an additional 6,000,000 shares of our Class A Common Stock. During the quarter ended July 2,
2010, 1,022,767 shares were repurchased under this authorization. See Note 12 to our unaudited condensed
consolidated financial statements in this Form 10-Q for additional information.
* Fiscal month
** Based on trade date - not settlement date
Form 10-Q
Page 37
Item 6. EXHIBITS
Exhibits.
Exhibit 10.1
The Timberland Company 2007 Incentive Plan, as amended, filed herewith.
Exhibit 31.1
Principal Executive Officer Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 31.2
Principal Financial Officer Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 32.1
Chief Executive Officer Certification Pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished herewith.
Exhibit 32.2
Chief Financial Officer Certification Pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished herewith.
Exhibit 101.INS
XBRL Instance Document
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Form 10-Q
Page 38
SIGNATURES
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. |
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THE TIMBERLAND COMPANY
(Registrant)
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|
Date: August 6, 2010 |
By: |
/s/ JEFFREY B. SWARTZ
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|
|
Jeffrey B. Swartz |
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|
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Chief Executive Officer |
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Date: August 6, 2010 |
By: |
/s/ CARRIE W. TEFFNER
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|
Carrie W. Teffner |
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Chief Financial Officer |
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Form 10-Q
Page 39
EXHIBIT INDEX
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|
|
Exhibit |
|
Description |
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|
|
Exhibit 10.1
|
|
The Timberland Company 2007 Incentive Plan, as amended, filed
herewith. |
|
|
|
Exhibit 31.1
|
|
Principal Executive Officer Certification Pursuant to Section 302
of
the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
Exhibit 31.2
|
|
Principal Financial Officer Certification Pursuant to Section 302
of
the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
Exhibit 32.1
|
|
Chief Executive Officer Certification Pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. |
|
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|
Exhibit 32.2
|
|
Chief Financial Officer Certification Pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. |
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|
Exhibit 101.INS
|
|
XBRL Instance Document |
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|
|
Exhibit 101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
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|
|
Exhibit 101.CAL
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|
XBRL Taxonomy Extension Calculation Linkbase Document |
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|
|
Exhibit 101.DEF
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|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
Exhibit 101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
Exhibit 101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |