The Timberland Company
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended September 30, 2005
OR
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o |
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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
Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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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) |
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.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
On
November 4,
2005, 53,180,238 shares of the registrants Class A Common Stock were outstanding and
11,743,660 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
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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September 30, |
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October 1, |
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December 31, |
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2005 |
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2004 |
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2004 |
Assets |
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Current assets |
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Cash and equivalents |
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$ |
117,634 |
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$ |
119,779 |
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$ |
309,116 |
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Accounts receivable, net of allowance for doubtful accounts of $10,243
at September 30, 2005, $9,276 at October 1, 2004 and $8,927 at December
31, 2004 |
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298,172 |
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279,182 |
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155,024 |
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Inventory |
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242,622 |
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182,979 |
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128,311 |
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Prepaid expense |
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31,994 |
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21,335 |
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27,659 |
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Deferred income taxes |
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23,524 |
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22,400 |
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28,937 |
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Derivative assets |
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5,122 |
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Total current assets |
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719,068 |
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625,675 |
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649,047 |
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Property, plant and equipment, net |
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77,373 |
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75,812 |
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78,979 |
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Goodwill |
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14,163 |
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14,163 |
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14,163 |
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Intangible assets |
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4,579 |
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3,991 |
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5,381 |
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Other assets, net |
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10,007 |
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9,496 |
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9,940 |
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Total assets |
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$ |
825,190 |
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$ |
729,137 |
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$ |
757,510 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$ |
125,670 |
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$ |
54,379 |
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$ |
52,370 |
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Accrued expense |
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Payroll and related |
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39,520 |
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42,996 |
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55,459 |
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Other |
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64,173 |
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67,970 |
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68,579 |
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Income taxes payable |
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47,844 |
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39,976 |
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34,737 |
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Derivative liabilities |
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4,264 |
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15,047 |
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Total current liabilities |
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277,207 |
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209,585 |
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226,192 |
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Deferred compensation and other liabilities |
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15,274 |
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11,081 |
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12,543 |
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Deferred income taxes |
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5,051 |
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8,086 |
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7,268 |
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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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Class A Common Stock, $.01 par value (1 vote per share); 120,000,000
shares authorized; 71,688,107 shares issued at September 30, 2005,
89,862,212 shares issued at October 1, 2004 and 90,718,018 shares issued
at December 31, 2004 |
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717 |
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899 |
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907 |
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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; 11,743,660 shares issued and outstanding at September 30,
2005, October 1, 2004 and December 31, 2004 |
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117 |
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117 |
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117 |
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Additional paid-in capital |
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211,603 |
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214,180 |
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238,829 |
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Deferred compensation |
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(30,498 |
) |
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(17,297 |
) |
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(22,584 |
) |
Retained earnings |
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692,124 |
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830,849 |
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875,887 |
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Accumulated other comprehensive income |
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10,203 |
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7,454 |
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10,228 |
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Treasury Stock at cost; 17,330,185 Class A shares at September 30, 2005,
32,335,736 Class A shares at October 1, 2004 and 34,098,914 Class A
shares at December 31, 2004 |
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(356,608 |
) |
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(535,817 |
) |
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(591,877 |
) |
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Total stockholders equity |
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527,658 |
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500,385 |
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511,507 |
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Total liabilities and stockholders equity |
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$ |
825,190 |
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$ |
729,137 |
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$ |
757,510 |
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Shares have been restated to reflect the 2-for-1 stock split in May 2005.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 4
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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October 1, |
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September 30, |
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October 1, |
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2005 |
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2004 |
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2005 |
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2004 |
Revenue |
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$ |
505,913 |
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$ |
493,933 |
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$ |
1,100,393 |
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$ |
1,045,920 |
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Cost of goods sold |
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258,555 |
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250,161 |
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547,894 |
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521,200 |
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Gross profit |
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247,358 |
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243,772 |
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552,499 |
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524,720 |
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Operating expense |
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Selling |
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111,259 |
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110,761 |
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297,236 |
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287,429 |
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General and administrative |
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28,462 |
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26,994 |
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77,304 |
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71,436 |
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Restructuring and related costs |
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2,531 |
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2,531 |
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Total operating expense |
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142,252 |
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|
137,755 |
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|
377,071 |
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358,865 |
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Operating income |
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105,106 |
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|
106,017 |
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|
175,428 |
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165,855 |
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Other income/(expense) |
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Interest income, net |
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570 |
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|
196 |
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2,734 |
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|
636 |
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Other, net |
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(900 |
) |
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|
205 |
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238 |
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|
411 |
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Total other income/(expense) |
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(330 |
) |
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401 |
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2,972 |
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1,047 |
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Income before provision for income taxes |
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104,776 |
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106,418 |
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178,400 |
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166,902 |
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Provision for income taxes |
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35,624 |
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37,778 |
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60,656 |
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59,250 |
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Net income |
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$ |
69,152 |
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$ |
68,640 |
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$ |
117,744 |
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$ |
107,652 |
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Earnings per share |
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Basic |
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$ |
1.04 |
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$ |
.98 |
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$ |
1.76 |
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$ |
1.54 |
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Diluted |
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$ |
1.02 |
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$ |
.96 |
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$ |
1.72 |
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$ |
1.50 |
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Weighted-average shares outstanding |
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Basic |
|
|
66,175 |
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|
69,924 |
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|
|
66,892 |
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|
|
69,970 |
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Diluted |
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|
67,697 |
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|
71,423 |
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|
68,359 |
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|
71,735 |
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Earnings per share and weighted-average shares have been restated to reflect the 2-for-1 stock split in May 2005.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 5
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
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For the Nine Months Ended |
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September 30, |
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October 1, |
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2005 |
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2004 |
Cash flows from operating activities: |
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Net income |
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$ |
117,744 |
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$ |
107,652 |
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Adjustments to reconcile net income to net cash used by operating activities: |
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Deferred income taxes |
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(3,488 |
) |
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|
1,323 |
|
Amortization of deferred compensation |
|
|
3,791 |
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|
2,357 |
|
Depreciation and other amortization |
|
|
18,190 |
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|
16,585 |
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Loss on disposal of property, plant and equipment |
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|
212 |
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|
86 |
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Tax benefit from stock option plans |
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6,490 |
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|
11,579 |
|
Increase/(decrease) in cash from changes in working capital: |
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Accounts receivable |
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(154,003 |
) |
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|
(154,386 |
) |
Inventory |
|
|
(116,360 |
) |
|
|
(63,469 |
) |
Prepaid expense |
|
|
(5,881 |
) |
|
|
4,471 |
|
Accounts payable |
|
|
79,693 |
|
|
|
16,733 |
|
Accrued expense |
|
|
(18,837 |
) |
|
|
(4,354 |
) |
Income taxes payable |
|
|
13,157 |
|
|
|
12,523 |
|
Other liabilities |
|
|
1,754 |
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Net cash used by operating activities |
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|
(57,538 |
) |
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(48,900 |
) |
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Cash flows from investing activities: |
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Additions to property, plant and equipment |
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(15,704 |
) |
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(15,577 |
) |
Other, net |
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|
147 |
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|
|
(1,561 |
) |
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|
Net cash used by investing activities |
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|
(15,557 |
) |
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(17,138 |
) |
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Cash flows from financing activities: |
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Common stock repurchases |
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(128,906 |
) |
|
|
(74,985 |
) |
Issuance of common stock |
|
|
17,668 |
|
|
|
19,172 |
|
|
|
|
Net cash used by financing activities |
|
|
(111,238 |
) |
|
|
(55,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents |
|
|
(7,149 |
) |
|
|
(173 |
) |
|
|
|
|
Net decrease in cash and equivalents |
|
|
(191,482 |
) |
|
|
(122,024 |
) |
Cash and equivalents at beginning of period |
|
|
309,116 |
|
|
|
241,803 |
|
|
|
|
Cash and equivalents at end of period |
|
$ |
117,634 |
|
|
$ |
119,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
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Interest paid |
|
$ |
290 |
|
|
$ |
356 |
|
Income taxes paid |
|
$ |
43,987 |
|
|
$ |
33,853 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 6
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
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain the adjustments necessary to present fairly The Timberland Companys (we,
our, us, Timberland or the Company) financial position, results of operations and changes
in cash flows for the interim periods presented. Such adjustments consist of normal recurring
items. The 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,
as amended by Amendments No. 1 and No. 2 on Form 10-K/A for the year ended December 31, 2004.
Our revenue consists of sales to wholesale customers, retail store revenues, license fees and
royalties. We record wholesale revenues when title passes and the risks and rewards of ownership
have passed to the customer, based on the terms of sale. Title passes generally upon shipment or
upon receipt by the customer, depending on the country of sale and the agreement with the customer.
Retail store revenues are recorded at the time of the sale. License fees and royalties are
recognized as earned per the terms of our licensing agreements.
In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping
and Handling Fees and Costs, in the third quarter and the first nine months of 2005 we recorded
$1,295 and $3,223 of reimbursed shipping expenses within revenues and the related shipping costs
within selling expense, respectively. In the third quarter and the first nine months of 2004 we
recorded $1,520 and $3,704 of reimbursed shipping expenses within revenues and the related shipping
costs within selling expense, respectively. Shipping costs included in selling expense were $5,733
and $4,839 for the third quarters of 2005 and 2004, and $14,744 and $12,046 for the first nine
months of 2005 and 2004, respectively.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. We estimate potential losses primarily based on our
historical rate of credit losses and our knowledge of the financial condition of our customers. We
also make other estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses as described in the Critical Accounting Policies discussion in Part I Item
2 of this report.
Note 2. Historical Financial Results
The results of operations for the three and nine months ended September 30, 2005 are not
necessarily indicative of the results to be expected for the full year. Historically, our revenue
has been more heavily weighted to the second half of the year.
Note 3. Stock Split
On March 3, 2005, the Company announced that its Board of Directors approved a 2-for-1 split of its
Class A and Class B Common Stock. The additional shares were distributed on May 2, 2005, to
shareholders of record on April 14, 2005. In addition, the Board of Directors approved the
retirement of 10.0 million Class A Treasury shares, on a pre-split basis. The Board also approved a
100% increase in shares remaining under its previously announced October 2003 repurchase program as
of the April 14, 2005 record date to reflect the impact of the stock split. The increase was
effective immediately after the May 2, 2005 distribution date. The shares presented in the
unaudited condensed consolidated balance sheets as of September 30, 2005, October 1, 2004 and
December 31, 2004, the number of shares used in the computation of earnings per share in the
unaudited condensed consolidated statements of income for the three and nine months ended September
30, 2005 and October 1, 2004 and the shares and earnings per share in the notes to the unaudited
condensed consolidated financial statements were based on the number of shares outstanding after
giving effect to the stock split, except as otherwise noted.
Form 10-Q
Page 7
Note 4. Stock-Based Compensation
We apply Accounting Principle Board (APB) Opinion No. 25 and related interpretations in
accounting for our stock plans, Statement of Financial Accounting Standards (SFAS) No. 123
Accounting for Stock-Based Compensation and SFAS No. 148 Accounting for Stock-Based
Compensation-Transitional and Disclosure-An Amendment of FASB Statement No. 123 for disclosure
purposes.
In our unaudited condensed consolidated statements of income, no compensation cost has been
recognized for stock option grants issued under any of our stock option plans; however, the Company
has recognized compensation cost for restricted stock awards. Had compensation cost for stock
option grants issued been determined under the fair value method of SFAS No. 123, our net income
and diluted earnings per share for the three and nine months ended September 30, 2005 and October
1, 2004 would have been:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
October 1, |
|
|
September 30, |
|
|
October 1, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income as reported |
|
$ |
69,152 |
|
|
$ |
68,640 |
|
|
$ |
117,744 |
|
|
$ |
107,652 |
|
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effect |
|
|
1,629 |
|
|
|
557 |
|
|
|
2,502 |
|
|
|
1,520 |
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effect |
|
|
3,822 |
|
|
|
2,543 |
|
|
|
8,585 |
|
|
|
7,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
66,959 |
|
|
$ |
66,654 |
|
|
$ |
111,661 |
|
|
$ |
101,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, as reported |
|
$ |
1.04 |
|
|
$ |
.98 |
|
|
$ |
1.76 |
|
|
$ |
1.54 |
|
Pro forma basic earnings per share |
|
$ |
1.01 |
|
|
$ |
.95 |
|
|
$ |
1.67 |
|
|
$ |
1.45 |
|
Diluted earnings per share, as reported |
|
$ |
1.02 |
|
|
$ |
.96 |
|
|
$ |
1.72 |
|
|
$ |
1.50 |
|
Pro forma diluted earnings per share |
|
$ |
.99 |
|
|
$ |
.93 |
|
|
$ |
1.63 |
|
|
$ |
1.41 |
|
The fair value of each stock option granted for the three and nine months ended September 30, 2005
and October 1, 2004 under our plans was estimated on the date of grant using the Black-Scholes
option pricing model. The following weighted-average assumptions were used to value grants issued
under our plans for the three and nine months ended September 30, 2005 and October 1, 2004,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
October 1, |
|
|
September 30, |
|
|
October 1, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Expected volatility |
|
|
28.3 |
% |
|
|
34.0 |
% |
|
|
29.6 |
% |
|
|
36.4 |
% |
Risk-free interest rate |
|
|
4.0 |
% |
|
|
2.8 |
% |
|
|
3.6 |
% |
|
|
1.8 |
% |
Expected lives (years) |
|
|
4.1 |
|
|
|
5.3 |
|
|
|
5.1 |
|
|
|
4.7 |
|
Dividend payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair values per share of stock options granted, for which exercise price
equals market value at the date of grant, were $9.94 and $10.11 for the three months ended
September 30, 2005 and October 1, 2004, respectively, and $11.57 and $10.33 for the nine months
ended September 30, 2005 and October 1, 2004, respectively.
Note 5. Earnings Per Share
Basic earnings per share 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
earnings per share (EPS) reflects the potential dilution that would occur if potentially dilutive
securities such as stock options were exercised. Dilutive securities included in the calculation of
diluted weighted-average shares were 1,521,686 and 1,499,620 for the three months ended September
30, 2005 and October 1, 2004, respectively, and 1,467,827 and 1,765,490 for the first nine months
of 2005 and 2004, respectively. Anti-dilutive securities excluded from the calculation of diluted
weighted-average shares were 902,960
and 1,218,821 for the third quarters of 2005 and 2004, respectively, and 658,534 and 910,028 for
the first nine months of 2005 and 2004, respectively.
Form 10-Q
Page 8
Note 6. Goodwill and Other Intangible Assets
We perform our annual impairment tests at the end of our second fiscal quarter and determined that
no impairment of reported goodwill had occurred in 2005.
Information regarding our other intangible assets, which consist of trademarks and patents,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
October 1, 2004 |
|
|
December 31, 2004 |
|
Carrying |
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
Amount |
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
$9,799 |
|
$(5,220) |
|
|
$4,579 |
|
|
$8,595 |
|
|
$(4,604) |
|
|
$3,991 |
|
|
$10,579 |
|
|
$(5,198) |
|
|
$5,381 |
|
Amortization expense of intangible assets with definite lives was $437 and $378 for the third
quarters of 2005 and 2004, respectively, and $1,321 and $1,068 for the first nine months of 2005
and 2004, respectively. The estimated amortization for existing intangible assets as of September
30, 2005, for each of the five succeeding fiscal years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
$1,782 |
|
$1,534 |
|
|
$1,204 |
|
|
$900 |
|
|
$479 |
|
The amortization period for other intangible assets and related expenses is five years.
Note 7. Derivatives
All derivatives entered into by the Company are designated as either cash flow or fair value
hedges. Cash flow hedges are derivative contracts hedging forecasted transactions. Fair value
hedges are derivatives hedging existing foreign currency assets or liabilities. The change in value
of cash flow hedges is recorded in other comprehensive income until the hedged transaction affects
earnings, at which point the other comprehensive income is reclassified to earnings. The change in
value of fair value hedges is recorded in earnings and is largely offset by the change in the fair
value of the underlying asset or liability. We are required to measure the effectiveness of our
cash flow hedges. If it is determined that a cash flow hedge is not effective, the ineffective
portion of a derivatives change in fair value will be immediately recognized in earnings.
In the normal course of business, the financial position and results of operations of the Company
are routinely subject to currency rate movements in non-U.S. Dollar denominated assets, liabilities
and income as we purchase and sell goods in local currencies. We have established policies and
business practices that should result in an appropriate level of protection against the adverse
effect of these exposures. We use derivative instruments, specifically forward contracts, to hedge
a portion of our forecasted foreign currency transactions, typically for a period not greater than
18 months. Those derivative instruments are viewed as risk management tools and are not used for
trading or speculative purposes. As of September 30, 2005, we had forward contracts maturing at
various dates through January 2007 to sell the equivalent of $210,808 in foreign currencies at
contracted rates. As of October 1, 2004, we had forward contracts maturing at various dates
through January 2006 to sell the equivalent of $231,862 in foreign currencies at contracted rates
and to buy the equivalent of $1,071 in foreign currencies at contracted rates.
On September 30, 2005, October 1, 2004 and December 31, 2004, we had derivative assets of $5,122
and derivative liabilities of $4,264 and $15,047, respectively. Those amounts reflect the fair
value of our cash flow hedges. The $5,122 derivative assets at September 30, 2005 represent hedges
in place through the fourth quarter of 2006.
Form 10-Q
Page 9
Note 8. Comprehensive Income
Comprehensive income for the three and nine months ended September 30, 2005 and October 1, 2004
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September |
|
|
October 1, |
|
|
September |
|
|
October 1, |
|
|
|
30, 2005 |
|
|
2004 |
|
|
30, 2005 |
|
|
2004 |
|
Net income |
|
$ |
69,152 |
|
|
$ |
68,640 |
|
|
$ |
117,744 |
|
|
$ |
107,652 |
|
Change in cumulative translation adjustment |
|
|
(699 |
) |
|
|
(99 |
) |
|
|
(14,068 |
) |
|
|
(1,045 |
) |
Change in fair value of derivative
financial instruments, net of taxes |
|
|
(1,176 |
) |
|
|
3,019 |
|
|
|
14,045 |
|
|
|
7,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
67,277 |
|
|
$ |
71,560 |
|
|
$ |
117,721 |
|
|
$ |
113,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2005 and October 1, 2004, the after tax hedging
gains/(losses) reclassified to earnings were $2,444 and ($2,995), respectively, and for the nine
months ended September 30, 2005 and October 1, 2004, the after tax hedging gains/(losses)
reclassified to earnings were $1,384 and ($6,262) respectively. For the three months ended
September 30, 2005, actual rates of exchange were below hedge contract rates, contributing to the
hedging gain. During 2005 actual rates of exchange have been lower than hedge contract rates
leading to a hedging gain for the nine months ended September 30, 2005 compared to a hedging loss
for the nine months ended October 1, 2004.
Note 9. Business Segments and Geographic Information
We manage our business in three reportable segments, each sharing similar product, distribution and
marketing. The reportable segments are U.S. Wholesale, U.S. Consumer Direct and International. The
U.S. Wholesale segment is comprised of the sale of products to wholesale customers in the United
States. This segment also includes royalties from licensed products sold in the United States and
the management costs and expenses associated with our worldwide licensing efforts. This segment now
includes certain marketing expenses and value added services previously included in Unallocated
Corporate. The U.S. Consumer Direct segment includes the Company-operated specialty and factory
outlet stores in the United States and our e-commerce business. The International segment consists
of the marketing, selling and distribution of footwear, apparel and accessories and licensed
products outside of the United States. Products are sold outside of the United States through our
subsidiaries (which use wholesale and retail channels to sell footwear, apparel and accessories),
independent distributors and licensees.
The Unallocated Corporate component of segment reporting consists primarily of corporate finance,
information services, legal and administrative expenses, United States distribution expenses, a
majority of United States marketing expenses, worldwide product development and other costs
incurred in support of Company-wide activities. Unallocated Corporate also includes total other
income/(expense), which is primarily interest income, net, and other miscellaneous
income/(expense), net. Such income/(expense) is not allocated among the reported 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 operating contribution,
which represents pre-tax income before unallocated corporate expenses, interest and other expenses,
net, and operating cash flow measurements. Total assets are disaggregated to the extent that
assets apply specifically to a single segment. Unallocated Corporate assets primarily consist of
cash and equivalents, manufacturing/sourcing assets, computers and related equipment, and United
States transportation and distribution equipment.
Form 10-Q
Page 10
For the Three Months Ended September 30, 2005 and October 1, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Consumer |
|
|
|
|
|
|
Unallocated |
|
|
|
|
|
|
Wholesale |
|
|
Direct |
|
|
International |
|
|
Corporate |
|
|
Consolidated |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
220,694 |
|
|
$ |
46,595 |
|
|
$ |
238,624 |
|
|
$ |
|
|
|
$ |
505,913 |
|
Operating income/(loss) |
|
|
78,364 |
|
|
|
5,512 |
|
|
|
76,643 |
|
|
|
(55,413 |
) |
|
|
105,106 |
|
Income/(loss) before income taxes |
|
|
78,364 |
|
|
|
5,512 |
|
|
|
76,643 |
|
|
|
(55,743 |
) |
|
|
104,776 |
|
Total assets |
|
|
291,324 |
|
|
|
34,424 |
|
|
|
369,029 |
|
|
|
130,413 |
|
|
|
825,190 |
|
Goodwill |
|
|
6,804 |
|
|
|
794 |
|
|
|
6,565 |
|
|
|
|
|
|
|
14,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
234,287 |
|
|
$ |
50,456 |
|
|
$ |
209,190 |
|
|
$ |
|
|
|
$ |
493,933 |
|
Operating income/(loss) |
|
|
84,893 |
|
|
|
6,728 |
|
|
|
60,547 |
|
|
|
(46,151 |
) |
|
|
106,017 |
|
Income/(loss) before income taxes |
|
|
84,893 |
|
|
|
6,728 |
|
|
|
60,547 |
|
|
|
(45,750 |
) |
|
|
106,418 |
|
Total assets |
|
|
242,190 |
|
|
|
34,128 |
|
|
|
292,360 |
|
|
|
160,459 |
|
|
|
729,137 |
|
Goodwill |
|
|
6,804 |
|
|
|
794 |
|
|
|
6,565 |
|
|
|
|
|
|
|
14,163 |
|
For the Nine Months Ended September 30, 2005 and October 1, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Consumer |
|
|
|
|
|
|
Unallocated |
|
|
|
|
|
|
Wholesale |
|
|
Direct |
|
|
International |
|
|
Corporate |
|
|
Consolidated |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
438,036 |
|
|
$ |
119,899 |
|
|
$ |
542,458 |
|
|
$ |
|
|
|
$ |
1,100,393 |
|
Operating income/(loss) |
|
|
143,748 |
|
|
|
12,746 |
|
|
|
140,939 |
|
|
|
(122,005 |
) |
|
|
175,428 |
|
Income/(loss) before income taxes |
|
|
143,748 |
|
|
|
12,746 |
|
|
|
140,939 |
|
|
|
(119,033 |
) |
|
|
178,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
450,067 |
|
|
$ |
122,823 |
|
|
$ |
473,030 |
|
|
$ |
|
|
|
$ |
1,045,920 |
|
Operating income/(loss) |
|
|
154,057 |
|
|
|
12,679 |
|
|
|
108,417 |
|
|
|
(109,298 |
) |
|
|
165,855 |
|
Income/(loss) before income taxes |
|
|
154,057 |
|
|
|
12,679 |
|
|
|
108,417 |
|
|
|
(108,251 |
) |
|
|
166,902 |
|
Form 10-Q
Page 11
Note 10. Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
October 1, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2004 |
|
|
|
Materials |
|
$ |
3,792 |
|
|
$ |
4,093 |
|
|
$ |
3,752 |
|
Work-in-process |
|
|
2,068 |
|
|
|
1,875 |
|
|
|
1,364 |
|
Finished goods |
|
|
236,762 |
|
|
|
177,011 |
|
|
|
123,195 |
|
|
|
|
Total |
|
$ |
242,622 |
|
|
$ |
182,979 |
|
|
$ |
128,311 |
|
|
|
|
In the fourth quarter of 2004, we established a Hong Kong procurement company and an international
treasury center in Switzerland. Related to the implementation of the new organizational structure,
we modified certain sourcing arrangements, which resulted in earlier transfer of title for a
portion of the Companys third party sourced product in 2005. Earlier transfer of title resulted in
offsetting higher quarter end inventory and accounts payable balances, as we recognized an
inventory asset and related payable roughly two weeks earlier than in the prior year period. Had
similar sourcing arrangements been in effect in the third quarter of 2004, we estimate that
inventory and accounts payable balances would have increased by approximately $43.5 million.
Adjusting for this change, on a comparable basis, inventory rose 7.1%.
Note 11. Restricted Stock Awards and Other
In 2004, our Board of Directors approved future awards of restricted share grants of Class A Common
Stock under the Companys 1997 Incentive Plan, as amended, and a cash incentive award. The award of
these restricted share grants and the cash incentive award is based on achieving certain
performance targets for the periods occurring between January 1, 2004 through December 31, 2006.
Based on the achievement of 2004 performance targets, 275,117 of restricted shares with a value of
$10,873 were awarded on July 5, 2005 and will vest equally over three years from the award date. An
additional grant, based on the achievement of a separate performance target, of 200,000 restricted
shares with a value of $7,904 was also awarded on July 5, 2005 and will vest two years after the
award date. These shares are subject to restrictions on sale and transferability, a risk of
forfeiture and certain other terms and conditions. Accordingly, we recorded deferred compensation
on our balance sheet to reflect these future awards. For the period January 1, 2005 through
December 31, 2006, grants of $9,185 and $9,509 will be made in 2006 and 2007, respectively, if
certain targeted performance goals are achieved. The award amount will vary based upon the degree
to which these performance goals are attained. The number of shares to be awarded will be
determined by the share price at that date. Additionally, a cash incentive award of up to $3,000
may be awarded in 2007 based on the achievement of a performance target over a three year
measurement period from January 1, 2004 to December 31, 2006.
In March 2005, our Board of Directors approved an additional cash incentive award. This cash
incentive award of up to $1,250 is based on achievement of a performance target over a one year
measurement period from January 1, 2005 to December 31, 2005, and may be awarded in 2007.
Note 12. Restructuring and Related Costs
On July 6, 2005, the Company announced plans to consolidate our Caribbean manufacturing operations.
We will be closing our Puerto Rico manufacturing facility at the end of 2005 and expanding our
manufacturing volume in the Dominican Republic. The consolidation of operations will produce
greater operational efficiencies.
The following table sets forth our restructuring activity through September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
Liabilities at |
|
|
Total |
|
Cash |
|
September 30, |
|
|
Charges(1) |
|
Payments |
|
2005 |
Severance and employment related charges |
|
$ |
2,283 |
|
|
$ |
61 |
|
|
$ |
2,222 |
|
Other charges |
|
|
33 |
|
|
|
9 |
|
|
|
24 |
|
Total |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,316 |
|
|
$ |
70 |
|
|
$ |
2,246 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total charges do not include $215 of accelerated depreciation
resulting from the change in estimated useful lives of assets related to the
planned closing of our manufacturing facility in Puerto Rico. |
Form 10-Q
Page 12
Severance and employment related charges consist primarily of severance, health benefits and other
employee related costs as a result of terminating approximately 300 employees under this
restructuring plan. Other charges consist of fees related to the closing of our manufacturing
facility in Puerto Rico.
We expect
to incur additional charges of approximately $2.5 million in the fourth quarter of 2005
and $0.5 million in the first quarter of 2006 to cover severance and employment related charges and
other costs, for a total of approximately $5.5 million of restructuring and related costs
associated with closing our manufacturing facility in Puerto Rico. We expect to complete the
restructuring plan in the first quarter of 2006 and continue to make cash payments for severance
benefits through the second quarter of 2007.
Note 13. Income Taxes
The effective tax rate for the three and nine months ended September 30, 2005 and October 1, 2004
was 34.0% and 35.5%, respectively. We established a Hong Kong procurement company and an
international treasury center in Switzerland in the fourth quarter of 2004, which better aligns our
organizational structure with our expanding global presence and reduces our estimated taxes on
foreign earnings.
Note 14. Share Repurchase
On September 23, 2003, our Board of Directors approved an additional repurchase of 4,000,000 shares
of our Class A Common Stock. On March 3, 2005, our Board of Directors approved a 100% increase in
shares remaining under its previously announced October 2003 repurchase program as of April 14,
2005, the record date of the 2-for-1 stock split. The increase was effective immediately after the
May 2, 2005 distribution date. On August 12, 2005, our Board of Directors approved an additional
repurchase of 2,000,000 shares of our Class A Common Stock. As of September 30, 2005, on a post
split basis, 3,101,386 shares remained under these authorizations. Shares repurchased on a post
split basis totaled 1,481,679 during the quarter ended September 30, 2005. We may use repurchased
shares to offset future issuances under the Companys stock-based employee incentive plans or for
other purposes. From time to time, we use Rule 10b5-1 plans to facilitate share repurchases.
Note 15. Litigation
We are involved in various litigation and legal matters that have arisen in the ordinary course of
business. Management believes that the ultimate resolution of any existing matter will not have a
material adverse effect on our consolidated financial statements.
Note 16. Subsequent Event
On
November 7, 2005, the Company signed a definitive agreement to acquire 100% of the outstanding
stock of SmartWool Corporation, a privately held company that designs, develops, markets and
distributes premium performance socks, apparel and accessories for men, women and children. The
purchase price is estimated to be approximately $82 million and will be funded through our existing
cash balances and short-term borrowings. The SmartWool organization will operate as a wholly-owned
subsidiary of The Timberland Company. The acquisition is expected to
be completed by mid December. The transaction should have minimal impact on fourth
quarter 2005 earnings.
Form 10-Q
Page 13
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discusses The Timberland Companys (we, our, us, Timberland or the Company)
results of operations and liquidity and capital resources. The discussion, including known trends
and uncertainties identified by management, should be read in conjunction with the unaudited
condensed consolidated financial statements and related notes.
Included are a discussion and
reconciliation of total Company and International revenue growth to
constant dollar revenue growth and a discussion and reconciliation of diluted
earnings per share (EPS) excluding restructuring and
related costs to diluted EPS.
Constant dollar revenue growth, which excludes the impact of changes in foreign exchange rates, and
diluted EPS excluding restructuring and related costs are not Generally
Accepted Accounting Principle (GAAP) performance measures. We provide constant dollar revenue
growth for total Company and International results because we use the measure to understand revenue
growth excluding any impact from foreign exchange rate changes. Management provides diluted EPS
excluding restructuring and related costs because we use the measure to understand earnings
excluding these identifiable expenses.
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 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 applying our critical accounting policies.
Currently, the Company is not aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported. Our significant accounting policies are
described in Note 1 to the Companys consolidated financial statements of our Annual Report on Form
10-K for the year ended December 31, 2004. Our estimates, assumptions and judgments involved in
applying the critical accounting policies are described in the Managements Discussion and Analysis
of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the
year ended December 31, 2004.
Recent
Developments
On
November 7, 2005, the Company signed a definitive
agreement to acquire 100% of the outstanding stock of SmartWool
Corporation, a privately held company that designs, develops, markets
and distributes premium performance socks, apparel and accessories
for men, women and children. The purchase price is estimated to be
approximately $82 million and will be funded through our
existing cash balances and short-term borrowings. The SmartWool
organization will operate as a wholly-owned subsidiary of The
Timberland Company. The acquisition is expected to be completed by
mid December. The transaction should have minimal impact on fourth
quarter 2005 earnings.
Overview
Our principal strategic goal is to become the authentic outdoor brand of choice globally. We
continue to develop a diverse portfolio of footwear, apparel and accessories that reinforces the
functional performance, benefits and classic styling that consumers have come to expect from our
brand. 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.
To deliver against our long-term goals, we are focused on driving progress on key strategic fronts.
These include enhancing our leadership position in our core footwear business, capturing the
opportunity that we see for outdoor-inspired apparel, extending brand reach through development of
new brand platforms and brand building licensing arrangements, expanding geographically, and
driving operational and financial excellence while setting the standard for commitment to the
community and striving to be a global employer of choice.
Highlights of our third quarter of 2005 financial performance, compared to the third quarter of
2004, include the following:
|
|
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Revenues increased 2.4% over record prior year results to $506 million. |
|
|
|
|
Operating profit decreased $0.9 million to $105.1 million, including impacts from $2.5
million of restructuring and related costs related to the consolidation of our Caribbean
manufacturing operations. |
|
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Operating margin decreased 70 basis points to 20.8%; 50 basis points of the decline
resulted from the restructuring
and related costs. |
Form 10-Q
Page 14
|
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|
Gross margin declined 50 basis points driven by U.S. product mix impacts, higher levels
of sales allowances, and moderately higher product costs. |
|
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|
Operating expense as a percentage of sales increased 20 basis points after restructuring
and related costs, but declined 30 basis points before restructuring and related costs,
reflecting cost control measures and timing of second half marketing expenditures. |
|
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Net income increased $0.5 million to $69.2 million. |
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Diluted EPS increased 6.3% from $0.96 to $1.02. Excluding restructuring and related
costs, diluted EPS was $1.05, up 9.4%. |
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Cash at the end of the quarter was $117.6 million with no debt outstanding. |
Results of Operations for the Three Months Ended September 30, 2005 and October 1, 2004
Revenue
Consolidated revenue growth of 2.4% in the third quarter of 2005 reflected double-digit constant
dollar gains in international markets which offset moderate declines in the U.S. International
revenues were $238.6 million, 14.1% ahead of the third quarter of 2004, or 14.2% in constant
dollars. International gains reflected strong growth in northern Europe and Asia. U.S. business
revenue totaled $267.3 million in the third quarter of 2005, down 6.1% from the prior year period,
reflecting soft U.S. boot sales and comparisons to strong prior year sell-in results. We anticipate
that current trends in the U.S. will continue in the fourth quarter, reflecting challenging
comparisons in boots and womens casual footwear and concerns about the overall consumer climate.
Foreign exchange rate changes had minimal impact on overall growth. We are also expecting negative
impacts from foreign exchange rate changes to reduce overall fourth quarter revenue by
approximately 2.0%.
Segments Review
We have three reportable business segments (see Note 9): U.S. Wholesale, U.S. Consumer Direct and
International.
Revenues for our U.S. Wholesale business decreased 5.8% to $220.7 million, driven by lower sales of
womens casual footwear in comparison to a very strong prior year sell-in of select womens
programs, and boots. These decreases were offset by gains in Timberland PROâ
series and kids footwear.
Timberlands U.S. Consumer Direct revenues decreased 7.7% to $46.6 million, impacted by a reduction
in net doors and a decline in comparable store sales of 7.1%. The comparable stores sales decline
was impacted by soft back-to-school results indicative of a relatively soft retail climate as well
as lower levels of promotions in key categories such as apparel. In the fourth quarter, we are
targeting approximately three store openings.
International revenues for the third quarter of 2005 expanded 14.1%, or 14.2% in constant dollars,
to $238.6 million. International growth was driven by strong gains in footwear and moderate gains
in apparel offset by declines in accessory sales. Overall, International revenues increased to
47.2% of total consolidated revenues for the quarter.
European revenues were $196.6 million, up 13.8% compared to the prior year period, with an increase
of 14.3% in constant dollars. Revenue growth was driven by continued strong growth in the UK,
increased sales at pan-European accounts and gains in key expansion markets such as Scandinavia.
European growth continues to be driven by strong footwear growth, supported by double-digit gains
in kids, boots, womens casual and outdoor performance footwear sales, in part driven by an
earlier phasing of wholesale orders in the second half of 2005, benefiting third quarter results.
Apparel revenues also increased as we continue to benefit from investments to strengthen our
offering and enhance our retail presence. In the third quarter, we added one new retail store and
expect to add approximately three new stores later this year.
In Asia, third quarter 2005 revenues grew 10.0%, or 9.5% in constant dollars, to $32.5 million,
driven by gains in key regions including double-digit growth in Taiwan, Hong Kong, Malaysia and
Singapore and modest growth in Japan. Growth was
driven by strong gains in outdoor performance and mens casual footwear, and apparel.
Form 10-Q
Page 15
Products
Worldwide footwear revenue was $399.0 million in the third quarter of 2005, up $10.9 million or
2.8% from the prior year period. On a constant dollar basis, footwear revenues increased 3.2%.
Growth was driven by global gains in kids, outdoor performance, mens casual, and Timberland
PROâ series footwear. Worldwide footwear unit sales were up 1.8%, while the
average price increased by 1.0%, reflecting impacts from product and geographic mix.
Worldwide apparel and accessories revenue of $101.5 million for the third quarter of 2005 was
relatively flat compared to the prior year. On a constant dollar basis, apparel and accessories
revenue increased 0.7%. Apparel and accessories unit sales increased 2.9% while average selling
prices fell 2.8%, reflecting product and channel mix and higher levels of off-price sales.
Channels
Revenue growth in the third quarter of 2005 was driven by growth in wholesale revenues, which were
up 3.1% to $420.2 million. Retail revenues declined 0.8% to $85.7 million, reflecting a 3.2%
decline in global comparable sales impacted by soft sales results in U.S. stores, which offset
gains internationally.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 48.9% for the third quarter of 2005, 50
basis points lower than in the third quarter of 2004. Gross margins were affected by U.S. product
mix impacts and higher levels of sales allowances. Product costs were
also somewhat higher in Q3. We anticipate product cost trends will continue in future quarters as we face increasing
pressure from macro factors such as higher oil-based commodity costs and comparisons to strong
prior year performance. In the third quarter, these factors were partially offset by favorable
impacts from foreign exchange hedges, which contributed 130 basis points of benefit, and business
mix benefits from strong international sales.
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 $32.7 million and $26.5 million for the third
quarters of 2005 and 2004, respectively.
Operating Expense
Operating expense for the third quarter of 2005 was $142.3 million, 3.3% higher than the $137.8
million reported in the 2004 third quarter. This includes the impact of restructuring and related
costs of $2.5 million related to the consolidation of our Caribbean manufacturing facilities (see
Note 12). As a percentage of revenue, operating expense increased by 20 basis points to 28.1%.
Excluding restructuring and related costs, operating expense decreased by 30 basis points to 27.6%,
and growth was controlled to 1.4%, with spending increases related primarily to growth in our
international business. Low operating expense growth in part reflected the phasing of our brand
building activities in the second half of 2005 to place greater emphasis on Holiday activities.
The operating expense increase was driven by a $0.5 million increase in selling expenses, a $1.5
million increase in general and administrative expense and restructuring and related costs of $2.5
million related to the consolidation of our Caribbean manufacturing facilities. Foreign exchange
rate changes decreased overall operating expense by $0.8 million, or 0.6%.
Selling expense for the third quarter of 2005 was $111.3 million, $0.5 million, or 0.4%, higher
than in the third quarter of 2004. The increase was driven by $2.3 million of costs related to
international retail expansion, $1.4 million in product development costs and $0.8 million in
distribution costs offset by decreases of $3.5 million in marketing expenditures and $2.2 million
in incentive compensation programs. Foreign exchange rate changes decreased overall selling
expense by $0.6 million, or 0.5%.
We include the costs of physically managing inventory (warehousing and handling costs) in selling
expense. These costs totaled $9.9 million and $9.6 million in the third quarters of 2005 and 2004,
respectively.
Advertising expense, which is also included in selling expense, was $8.5 million and $11.3 million
in the third quarters of
2005 and 2004, respectively. The decrease primarily reflected reductions in U.S. cooperative
advertising costs. Advertising costs are expensed at the time the advertising is used,
predominantly in the season that the advertising costs are paid. Prepaid advertising recorded on
our unaudited condensed consolidated balance sheets on September 30, 2005 and October 1, 2004
Form 10-Q
Page 16
was
$3.7 million and $2.2 million, respectively.
General and administrative expense for the third quarter of 2005 was $28.5 million, $1.5 million,
or 5.4%, higher than the prior year period. As a percentage of revenue, general and administrative
expense increased by 20 basis points, compared with the prior year period. The increase reflected
investments in strategic initiatives, global support services and organizational capability in the international business offset by a decrease of $0.9 million in incentive compensation. Foreign
exchange rate changes decreased overall general and administrative expense by $0.2 million, or
0.9%.
Operating Income
Operating income for the third quarter of 2005 was $105.1 million, $0.9 million, or 0.9% lower than
third quarter 2004. Operating income as a percentage of revenue decreased 70 basis points to 20.8%.
Excluding restructuring and related costs, operating income increased by $1.6 million and operating
profit as a percentage of revenue dropped 20 basis points to 21.3%.
Trends in our U.S. business, combined with plans to shift second half
global brand building investments to the fourth quarter, will likely
pressure fourth quarter operating profits in comparison to the prior
year.
Operating income for our U.S. Wholesale segment was $78.4 million, 7.7% lower than the prior year
period. The revenue decrease of 5.8% and gross margin decline of 230 basis points were partially
offset by a 160 basis point improvement in operating expense as a percent of revenue, reflecting
cost control efforts. Sales results reflected lower sales of womens casual and boot product,
impacted by retailer caution following soft prior year sell-through results. Gross margin rates
were negatively impacted by product mix and higher levels of sales allowances. Given current
trends, we anticipate continued pressure on U.S. Wholesale sales and gross margins in the fourth
quarter of 2005.
U.S. Consumer Direct segment operating income for the third quarter of 2005 was $5.5 million, down
18.1% from the prior year period reflecting a 7.1% decrease in comparable store sales and impacts
from a reduction in net doors over the last year. Sales results reflected a relatively soft
back-to-school season, impacted by challenging overall market conditions. Gross margins were
relatively the same as the prior year, while operating expense as a percentage of sales increased 150 basis
points against a smaller revenue base.
Operating income for our International segment grew by 26.6% to $76.6 million, driven by revenue
growth of 14.1%, a 220 basis point improvement in gross margin rates, and a 90 basis point
improvement in operating expense as a percentage of revenues. Sales results reflected strong
footwear gains and benefits from an earlier phasing of customer orders in the second half of 2005
relative to the prior year. Improvements in gross margin reflected favorable foreign exchange rate
changes and product mix driven by strong footwear sales.
Our Unallocated Corporate expenses, which include central support and administrative costs, not
allocated to our business segments, increased 20.1% to $55.4 million. Unallocated Corporate
expenses as a percentage of total revenue increased 160 basis points to 11.0% of total revenue.
Excluding restructuring and related costs of $2.5 million resulting from the consolidation of our
Caribbean manufacturing operations, Unallocated Corporate expenses increased 14.6% from the prior
year and increased 110 basis points to 10.5% of total revenue.
Other Income and Taxes
Interest income, net, which is comprised of interest income offset by fees related to the
establishment and maintenance of our revolving credit facility and interest paid on short-term
borrowings, was $0.6 million and $0.2 million for the third quarters of 2005 and 2004,
respectively. Higher interest rates supported the increase in net interest income.
Other, net included $0.9 million of foreign exchange losses resulting from the timing of settlement
of local currency denominated receivables and payables. These losses were driven by the volatility
of exchange rates within the third quarter of 2005, and should not be considered indicative of
expected future results.
The effective income tax rate was 34.0% in the third quarter of 2005, compared to 35.5% in the
third quarter of 2004. We established a Hong Kong procurement company and an international treasury
center in Switzerland in the fourth quarter of
2004, which better aligns our organizational structure with our expanding global presence and
reduces our estimated taxes on foreign earnings.
Form 10-Q
Page 17
Results of Operations for the Nine Months Ended September 30, 2005 and October 1, 2004
Revenue
Consolidated revenues of $1,100.4 million reflected growth of 5.2% in the first nine months of
2005, comprised of double-digit constant dollar gains in our International business which offset
modest declines in our U.S. business. U.S. business revenue totaled $557.9 million in the first
nine months of 2005, down 2.6% from the prior year period. International revenues were $542.5
million, 14.7% ahead of the first nine months of 2004, or 12.4% in constant dollars. Overall,
changes in currency exchange rates were responsible for 1.0% of consolidated revenue growth.
Segments Review
Revenues for our U.S. Wholesale business decreased 2.7% to $438.0 million. Double-digit growth in
Timberland PROâ series and outdoor performance footwear, and solid growth in mens
casual footwear and apparel and accessories, were offset by declines in womens casual footwear,
impacted by comparisons to a very strong prior year sell-in of select programs, and a modest
decline in boots.
U.S. Consumer Direct sales were $119.9 million, down 2.4% compared to the prior year, impacted by a
reduction in net doors and comparable store sales declines of 1.4%. Sales results reflected gains
in accessories and mens casual and kids footwear, offset by declines in womens casual footwear,
apparel and boots.
International revenues for the first nine months of 2005 increased 14.7%, or 12.4% on constant
dollar basis, to $542.5 million, benefiting from strong growth in our kids and boots footwear
categories, foreign exchange rate benefits and solid growth from apparel and outdoor performance
footwear. Overall, International revenues increased to 49.3% of total consolidated revenues.
European revenues were $432.3 million, up 14.9%, or 12.6% on a constant dollar basis, compared to
the prior year period. Revenues were driven by double-digit growth in key European markets such as
the UK, pan-European accounts, and Scandinavia and moderate growth in Spain, Italy, Germany and
France. European footwear sales gains were driven by double-digit constant dollar gains in kids
and boots as well as solid growth in outdoor performance, womens casual and mens casual. Apparel
sales were also up moderately, reflecting benefits from our enhanced focus on Timberlands core
heritage consumer.
In Asia, revenues grew 12.8%, or 11.0% in constant dollars, to $91.8 million, reflecting
double-digit gains in key Southeast Asia markets such as Taiwan and Hong Kong and solid growth in
Japan. Growth was driven by strong gains in apparel and key footwear categories such as outdoor
performance, mens casual and boots.
Products
Worldwide footwear revenue was $842.6 million in the first nine months of 2005, up 5.2% from the
prior year period. On a constant dollar basis, footwear revenues increased 4.5%. Growth was driven
by global gains in kids, boots, outdoor performance, mens casual, and Timberland
PROâ series footwear. Worldwide footwear unit sales were up 5.7%, while the
average price decreased by 0.5%, reflecting higher levels of off-price sales and impacts of product
mix, offset by foreign exchange rate benefits.
Worldwide apparel and accessories revenue for the first nine months of 2005 grew by 4.4% to $245.7
million. On a constant dollar basis, apparel and accessories revenue increased 3.3%. Apparel and
accessories unit sales increased 4.3% while average selling prices were relatively unchanged.
Channels
Revenue growth in the first nine months of 2005 reflected solid global gains in the wholesale
channel and moderate gains in the consumer direct channels. Global wholesale revenues grew 5.9% to
$864.6 million while global consumer direct revenues increased 2.7% to $235.8 million. Worldwide
comparable store sales increased 0.7%. Globally, we opened twenty-two retail locations and closed
fourteen in the first nine months of 2005.
Form 10-Q
Page 18
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 50.2% for the first nine months of
2005, unchanged from gross margin for the first nine months of 2004. Favorable foreign exchange
benefits and international mix benefits were offset by U.S. product mix impacts and the impacts
from higher levels of off-price and discounted sales.
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 $75.9 million and $68.9 million for the first
nine months of 2005 and 2004, respectively.
Operating Expense
Operating expense for the first nine months of 2005 was $377.1 million, 5.1% higher than the $358.9
million reported in the first nine months of 2004. This includes the impact of restructuring and
related costs of $2.5 million related to the consolidation of our Caribbean manufacturing
facilities. As a percentage of revenue, operating expense remained flat at 34.3%. Excluding
restructuring and related costs, operating expense as a percentage of revenue decreased by 30 basis
points to 34.0%, and growth was controlled to 4.4%, with spending increases related primarily to
growth in our international business.
The operating expense increase was driven by a $9.8 million increase in selling expenses, a $5.9
million increase in general and administrative expense and restructuring and related costs of $2.5
million related to the consolidation of our Caribbean manufacturing facilities. Foreign exchange
rate changes added $2.6 million, or 0.7%, to overall operating expense growth.
Selling expense for the first nine months of 2005 was $297.2 million, $9.8 million, or 3.4% higher
than in the first nine months of 2004. The increase was driven by $5.4 million of costs related to
international retail expansion, $3.8 million in distribution costs and $2.6 million in product
development costs offset by decreases of $3.7 million in incentive compensation programs and $3.2
in marketing expenditures. Foreign exchange rate changes added $2.5 million, or 0.9%, to overall
selling expense growth.
We include the costs of physically managing inventory (warehousing and handling costs) in selling
expense. These costs totaled $27.5 million and $25.4 million in the first nine months of 2005 and
2004, respectively.
Advertising expense, which is also included in selling expense, was $19.8 million and $25.0 million
in the first nine months of 2005 and 2004, respectively. The decrease primarily reflected
reductions in U.S. cooperative advertising costs. Advertising costs are expensed at the time the
advertising is used, predominantly in the season that the advertising costs are paid.
General and administrative expense for the first nine months of 2005 was $77.3 million, $5.9
million, or 8.2% higher than the prior year period. As a percentage of revenue, general and
administrative expense increased by 20 basis points, compared with the prior year period. The
increase reflected investments in global support services, organizational capability in the
international business and strategic initiatives. Foreign exchange rate changes related to overall
general and administrative expense remained relatively flat.
Operating Income
Operating income for the first nine months of 2005 was $175.4 million, $9.6 million, or 5.8% higher
than the first nine months of 2004. Operating income as a percentage of revenue was unchanged at
15.9%.
Operating income for our U.S. Wholesale segment was $143.7 million, 6.7% lower than the prior year
period. Revenue decreased by 2.7% while gross margin declined by 260 basis points. The decrease in
gross margin was driven by higher levels of off-price sales related to inventory control efforts
and product mix impacts. Operating expense as a percentage of revenue improved by 120 basis points
to 11.0%, reflecting cost control efforts and the phasing of brand building efforts to place
greater emphasis on the 2005 Holiday season.
Our U.S. Consumer Direct segments operating income for the first nine months of 2005 increased
modestly to $12.7 million, 0.5% higher than the prior period. Revenues decreased 2.4% reflecting a
comparable store sales decline of 1.4%. Gross margin rates remained relatively flat while operating
expenses as a percentage of sales improved 20 basis points,
reflecting our focus on improving returns in our retail portfolio.
Form 10-Q
Page 19
Operating income for our International segment grew by 30.0% to $140.9 million for the first nine
months. Strong profit gains were driven by 14.7% revenue gains and a 230 basis point gross margin
improvement, reflecting favorable foreign exchange hedge rate changes and benefits from strong
footwear sales. Operating expense rates improved by 80 basis points, reflecting benefits from sales
leverage.
Our Unallocated Corporate expenses, which include central support and administrative costs, not
allocated to our business segments, increased 11.6% to $122.0 million. Unallocated Corporate
expenses as a percentage of total revenue fell 60 basis points to 11.1% of total revenue. Excluding
restructuring and related costs of $2.5 million resulting from the consolidation of our Caribbean
manufacturing operations, Unallocated Corporate expenses increased 9.3% from the prior year and
fell 40 basis points to 10.9% of total revenue.
Other Income and Taxes
Interest income, net, which is comprised of interest income offset by fees related to the
establishment and maintenance of our revolving credit facility and interest paid on short-term
borrowings, was $2.7 million and $0.6 million for the first nine months of 2005 and 2004,
respectively. Higher interest rates and higher cash balances supported the increase in net interest
income.
Other, net included $0.6 million of foreign exchange losses resulting from the timing of settlement
of local currency denominated receivables and payables. These losses were driven by the volatility
of exchange rates within the first nine months of 2005, and should not be considered indicative of
expected future results.
The effective income tax rate was 34.0% in the first nine months of 2005, compared to 35.5% in the
first nine months of 2004. We established a Hong Kong procurement company and an international
treasury center in Switzerland in the fourth quarter of 2004, which better aligns our
organizational structure with our expanding global presence and reduces our estimated taxes on
foreign earnings.
Reconciliation of Total and International Revenue Increases To Constant Dollar Revenue
Increases
Total Company Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, 2005 |
|
Ended September 30, 2005 |
|
|
$ Millions |
|
|
|
|
|
$ Millions |
|
|
|
|
Change |
|
% Change |
|
Change |
|
% Change |
|
|
|
Revenue increase (GAAP) |
|
$ |
12.0 |
|
|
|
2.4 |
% |
|
$ |
54.5 |
|
|
|
5.2 |
% |
(Decrease)/increase due to foreign exchange rate changes |
|
|
(0.3 |
) |
|
|
(0.1 |
%) |
|
|
10.8 |
|
|
|
1.0 |
% |
|
|
|
Revenue increase in constant dollars |
|
$ |
12.3 |
|
|
|
2.5 |
% |
|
$ |
43.7 |
|
|
|
4.2 |
% |
International Revenue Reconciliation:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, 2005 |
|
Ended September 30, 2005 |
|
|
$ Millions |
|
|
|
|
|
$ Millions |
|
|
|
|
Change |
|
% Change |
|
Change |
|
% Change |
|
|
|
Revenue increase (GAAP) |
|
$ |
29.4 |
|
|
|
14.1 |
% |
|
$ |
69.4 |
|
|
|
14.7 |
% |
(Decrease)/increase due to foreign exchange rate changes |
|
|
(0.3 |
) |
|
|
(0.1 |
%) |
|
|
10.8 |
|
|
|
2.3 |
% |
|
|
|
Revenue increase in constant dollars |
|
$ |
29.7 |
|
|
|
14.2 |
% |
|
$ |
58.6 |
|
|
|
12.4 |
% |
Management provides constant dollar revenue growth for total Company and International results
because we use the measure to understand revenue growth excluding any impact from foreign exchange
rate changes.
Form 10-Q
Page 20
Reconciliation of Diluted EPS to Diluted EPS Excluding Restructuring and Related Costs
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, 2005 |
|
Ended September 30, 2005 |
|
|
|
Diluted EPS (GAAP) |
|
$1.02 |
|
|
$1.72 |
|
Per share impact of restructuring and related costs |
|
(0.03) |
|
|
(0.03) |
|
|
|
|
Diluted EPS excluding restructuring and related costs |
|
$1.05 |
|
|
$1.75 |
|
Management provides diluted EPS excluding restructuring and related costs because we use the
measure to understand earnings excluding these identifiable expenses.
Accounts Receivable and Inventory
Accounts receivable increased 6.8% to $298.2 million at September 30, 2005, compared with $279.2
million reported at October 1, 2004. Days sales outstanding increased two days to 53 days
reflecting a shift in revenue to later in the quarter offset by improved collection performance.
Wholesale days outstanding increased one day from 55 to 56 days for the third quarters ended
October 1, 2004 and September 30, 2005, respectively.
Inventory increased 32.6% to $242.6 million at September 30, 2005 from $183.0 million at October 1,
2004. In the fourth quarter of 2004, we established a Hong Kong procurement company and an
international treasury center in Switzerland to better align our organizational structure with our
expanding global presence and provide enhanced support to our global sourcing operations and
International business. Related to the implementation of the new organizational structure, we
modified certain sourcing arrangements, which resulted in earlier transfer of title for a portion
of the Companys third party sourced product in 2005. Earlier transfer of title resulted in
offsetting higher quarter end inventory and accounts payable balances, as we recognized an
inventory asset and related payable roughly two weeks earlier than in the prior year period. Had
similar sourcing arrangements been in effect in the third quarter of 2004, we estimate that
inventory and accounts payable balances would have increased by approximately $43.5 million.
Adjusting for this change, on a comparable basis, inventory rose 7.1%. Had the new sourcing
arrangements been in place in the past, we estimate our annual inventory turns would have been 3.9
times for both the third quarters of 2005 and 2004. The earlier transfer of title has no impact on
profit or cash flow.
Liquidity and Capital Resources
Net cash used by operations for the first nine months of 2005 was $57.5 million, compared with
$48.9 million for the first nine months of 2004. The increase in the use of cash in the first nine
months of 2005 compared with 2004 was primarily due to an increase in inventory and prepaid
expenses and reduced accrued expenses offset by an increase in accounts payable, the timing of tax
payments and higher net income.
Net cash used for investing activities amounted to $15.6 million in the first nine months of 2005,
compared with $17.1 million in the first nine months of 2004. Capital expenditures in 2005 were
$15.7 million versus $15.6 million in 2004, primarily driven by investments in our international
business and manufacturing and distribution equipment.
Net cash used for financing activities was $111.2 million in the first nine months of 2005,
compared with $55.8 million in the first nine months of 2004. Cash flows from financing activities
reflected share repurchases of $128.9 million in the first nine months of 2005, compared with $75.0
million in the first nine months of 2004. We received cash inflows of $17.7 million in the first
nine months of 2005 from the issuance of common stock related to the exercise of employee stock
options, compared with $19.2 million in the first nine months of 2004.
We have an unsecured committed revolving credit agreement with a group of banks, which matures on
April 30, 2007 (Agreement), unless prior to April 30, 2006, we elect to extend the final maturity
date to April 30, 2008. The Agreement provides for $200 million of committed borrowings, of which
up to $125 million may be used for letters of credit. Under certain circumstances, we may increase
the committed borrowing limit by $50 million for a total commitment of $250 million. Under the
terms of the Agreement, we may borrow at interest rates based on eurodollar rates (approximately
3.7% at September 30, 2005), plus an applicable margin based on a fixed-charge coverage grid of
between 50 and 100 basis points that is adjusted quarterly. At September 30, 2005, the applicable
margin under the facility was 60 basis points. We will pay a
commitment fee of 12.5 to 25 basis points per annum on the total commitment, based on a
fixed-charge coverage grid that is adjusted
Form 10-Q
Page 21
quarterly. At September 30, 2005, the commitment fee
was 15 basis points. The Agreement places certain limitations on additional debt, stock
repurchases, acquisitions, amount of dividends we may pay, and certain other financial and
non-financial covenants. The primary financial covenants relate to maintaining a minimum fixed
charge coverage of 3:1, a leverage ratio of 1.5:1 and under certain conditions, a minimum level of
earnings before income tax, depreciation and amortization. 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 had uncommitted lines of credit available from certain banks totaling $50 million at September
30, 2005. Any borrowings under these lines would be at prevailing money market rates (approximately
4.2% at September 30, 2005). Further, we had 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 the Company.
Management believes that our capital needs for the balance of 2005 will be met through our current
cash balances, our existing credit facilities and cash from operations, without the need for
additional permanent financing. However, as discussed in the exhibit to our Annual Report on Form
10-K entitled Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995 and in Forward-looking Information below, several risks
and uncertainties could cause the Company to need to 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. The availability and terms of any
such financing would be subject to prevailing market conditions and other factors at that time.
Off Balance Sheet Arrangements
As of September 30, 2005 and October 1, 2004, we had letters of credit outstanding of $14.0 million
and $18.8 million, respectively. The reduction in letters of credit outstanding was driven by a
decrease in the number of vendors requiring letters of credit for payment. These letters of credit
were issued predominantly for the purchase of inventory. As of September 30, 2005, the Company had
$210.8 million in hedging contracts outstanding, all of which are due to settle within the next 16
months (see Note 7).
We have the following off balance sheet arrangements:
(Dollars in Millions)
|
|
|
|
|
|
|
Total Amounts |
|
September 30, 2005 |
|
Committed |
|
|
Lines of credit |
|
$ |
|
|
Letters of credit |
|
|
14.0 |
|
Hedging contracts |
|
|
210.8 |
|
|
|
|
|
Total |
|
$ |
224.8 |
|
|
|
|
|
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
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. We anticipate that capital requirements for the balance of 2005 will be met through
the use of our current cash balances, through our existing credit facility (which places certain
limitations on additional debt, stock repurchases, acquisitions and on the amount of dividends we
may pay, and also contains certain other financial and operating covenants) and through cash flow
from operations, without the need for additional permanent financing. However, if the need arises,
our ability to obtain any additional credit facilities will depend upon prevailing market
conditions, our financial condition and the terms and conditions of such additional facilities.
Form 10-Q
Page 22
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share-Based Payment. This statement is a revision of SFAS No. 123 and supersedes APB Opinion No.
25 and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in exchange for share-based payment
transactions. The Statement requires entities to recognize stock compensation expense for awards of
equity instruments to employees based on the grant-date fair value of those awards (with limited
exceptions). In April 2005, the Securities and Exchange Commission announced the adoption of a new
rule that amends the compliance dates for SFAS No. 123R. The Commissions new rule allows
implementation of SFAS No. 123R at the beginning of a companys next fiscal year instead of the
first interim or annual reporting period that begins after June 15, 2005. We will adopt the
statement on January 1, 2006. Our adoption of SFAS No. 123R will increase stock-based compensation
expense and decrease net income. In addition, SFAS No. 123R requires that the excess tax benefits
related to stock-based compensation be reported as a cash inflow from financing activities rather
than a reduction of taxes paid in cash from operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error CorrectionsA Replacement
of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 applies to all voluntary changes in
accounting principle and requires retrospective application to prior periods financial statements
of changes in accounting principle, unless it is impracticable. SFAS No. 154 requires that a change
in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted
for as a change of estimate affected by a change in accounting principle. SFAS No. 154 also carries
forward without change the guidance in APB Opinion No. 20 with respect to accounting for changes in
accounting estimates, changes in the reporting unit and correction of an error in previously issued
financial statements. The Company is required to adopt SFAS No. 154 for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS
No. 154 is not expected to have a material effect on the Companys consolidated financial position
or results of operations.
In June 2005, the FASBs Emerging Issues Task Force reached a consensus on Issue No. 05-6,
Determining the Amortization Period for Leasehold Improvements (EITF 05-6). The guidance
requires that leasehold improvements acquired in a business combination or purchased subsequent to
the inception of a lease be amortized over the lesser of the useful life of the assets or a term
that includes renewals that are reasonably assured at the date of the business combination or
purchase. The guidance is effective for periods beginning after June 29, 2005. The adoption of EITF
05-6 is not expected to have a material effect on the Companys consolidated financial position or
results of operations.
Form 10-Q
Page 23
Forward-looking Information
As discussed in Exhibit 99.1 entitled Cautionary Statements for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995, of our Annual Report on Form
10-K for the year ended December 31, 2004, 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.
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, consumer acceptance of products, and
other factors affecting retail market conditions, including the current U.S. economic
environment and the global economic and political uncertainties resulting from the
continuing war on terrorism; |
|
|
|
|
Our ability to adapt to potential changes in duty structures in countries of import and
export including anti-dumping measures being considered by the European Union with respect
to leather footwear imported from China and Vietnam and safety footwear imported from China
and India; |
|
|
|
|
Our ability to locate and retain independent manufacturers to produce lower cost,
high-quality products with rapid turnaround times; |
|
|
|
|
Our ability to manage our foreign exchange rate risks; |
|
|
|
|
Our reliance on a limited number of key suppliers; |
|
|
|
|
Our ability to obtain adequate materials at competitive prices; |
|
|
|
|
Our ability to successfully invest in our infrastructure and product based upon advance sales forecasts; |
|
|
|
|
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 ours. |
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 24
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 income. We regularly assess these risks and have established policies and business
practices that should result in an appropriate level of protection against 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 in our hedging of foreign currency transactions. These debt
instruments and 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
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. At September 30, 2005 and October 1, 2004, 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 minimize the impact
of these foreign currency fluctuations by hedging the related transactions with foreign currency
forward contracts. Currently, these foreign currency forward contracts will expire in 16 months or
less. Based upon sensitivity analysis as of September 30, 2005, a 10% change in foreign exchange
rates would cause the fair value of our financial instruments to increase/decrease by approximately
$20.4 million, compared with $23.5 million at October 1, 2004.
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 as of September 30, 2005, 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.
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 September
30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Form 10-Q
Page 25
Part II OTHER INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES(1)
For the Three Fiscal Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
of Shares |
|
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
|
That May Yet |
|
|
|
Total Number |
|
|
|
|
|
|
of Publicly |
|
|
be Purchased |
|
|
|
of Shares |
|
|
Average Price |
|
|
Announced |
|
|
Under the Plans |
|
Period* |
|
Purchased ** |
|
|
Paid per Share |
|
|
Plans or Programs |
|
|
or Programs |
|
July 2 July 29 |
|
|
164,288 |
|
|
$ |
37.59 |
|
|
|
164,288 |
|
|
|
2,418,777 |
|
July 30 August 26 |
|
|
541,848 |
|
|
|
33.93 |
|
|
|
541,848 |
|
|
|
3,876,929 |
|
August 27 September 30 |
|
|
775,543 |
|
|
|
33.26 |
|
|
|
775,543 |
|
|
|
3,101,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 Total |
|
|
1,481,679 |
|
|
$ |
33.98 |
|
|
|
1,481,679 |
|
|
|
|
|
Footnote (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved |
|
|
|
|
|
|
Announcement |
|
|
Program |
|
|
Expiration |
|
|
|
Date |
|
|
Size (Shares) |
|
|
Date |
|
Program 1 |
|
10/16/2003 |
|
|
8,000,000 |
|
|
None |
Program 2 |
|
10/27/2005 |
|
|
2,000,000 |
|
|
None |
No existing programs expired or were terminated during the reporting period. See Note 14 to our unaudited condensed consolidated financial
statements in this Form 10-Q for additional information.
Except for the shares in program 2, share and price per share information is adjusted to reflect the Companys 2-for-1 stock split. The Board
approved a 100% increase in shares remaining under its previously announced October 2003 repurchase program as of the April 14, 2005 record date
to reflect the impact of the stock split. The increase was effective immediately after the May 2, 2005 distribution date.
|
|
|
* |
|
Fiscal month |
|
** |
|
Based on trade date not settlement date |
Form 10-Q
Page 26
Item 6. EXHIBITS
(a) Exhibits.
|
|
|
|
|
|
|
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. |
Form 10-Q
Page 27
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.
|
|
|
|
|
|
|
THE TIMBERLAND COMPANY
(Registrant) |
|
|
|
|
|
|
|
By:
|
|
/S/ BRIAN P. MCKEON |
|
|
|
|
|
Date: November 9, 2005
|
|
|
|
Brian P. McKeon |
|
|
|
|
Executive Vice President-Finance and Administration, Chief |
|
|
|
|
Financial Officer |
|
|
|
|
|
|
|
By:
|
|
/S/ JOHN CRIMMINS |
|
|
|
|
|
Date: November 9, 2005
|
|
|
|
John Crimmins |
|
|
|
|
Vice President, Corporate Controller and Chief Accounting Officer |
Form 10-Q
Page 28
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
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. |