TIMBERLAND CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2002

o	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)

Delaware (State or other jurisdiction of incorporation or organization)		02-0312554 (I.R.S. Employer Identification Number)
200 Domain Drive, Stratham, New Hampshire (Address of principal executive offices)		03885 (Zip Code)

(603) 772-9500
Registrant's telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

On July 26, 2002, 29,797,885 shares of the registrant's Class A Common Stock were outstanding and 7,711,185 shares of the registrant's Class B Common Stock were outstanding.

THE TIMBERLAND COMPANY
FORM 10-Q
TABLE OF CONTENTS

		Page(s)
Part I Financial Information (unaudited)
	Condensed Consolidated Balance Sheets — June 28, 2002 and December 31, 2001	1-2
	Condensed Consolidated Statements of Income — For the three and six months ended June 28, 2002 and June 29, 2001	3
	Condensed Consolidated Statements of Cash Flows — For the six months ended June 28, 2002 and June 29, 2001	4
	Notes to Condensed Consolidated Financial Statements	5-8
	Management's Discussion and Analysis of Financial Condition and Results of Operations	9-13
Part II Other Information		14-16

Part I Financial Information

THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars in Thousands)
(Unaudited)

			June 28, 2002			December 31, 2001
Current assets
	Cash and equivalents		$	72,276		$	105,658
	Accounts receivable, net of allowance for doubtful accounts of $7,531 at June 28, 2002 and $5,934 at December 31, 2001			113,032			132,751
	Inventory			160,259			127,172
	Prepaid expense			17,413			17,093
	Deferred income taxes			24,955			19,822
	Other assets			—			3,047

		Total current assets		387,935			405,543

Property, plant and equipment				171,331			166,365
Less accumulated depreciation and amortization				(97,965	)		(90,157	)

		Net property, plant and equipment		73,366			76,208
Excess of cost over fair value of net assets acquired, net				14,163			14,163
Other assets, net				9,243			8,698

Total assets			$	484,707		$	504,612

See accompanying notes to condensed consolidated financial statements.

THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

				June 28, 2002			December 31, 2001
Current liabilities
	Accounts payable			$	42,684		$	40,637
	Accrued expense
		Payroll and related			21,520			23,918
		Other			43,248			42,611
	Income taxes payable				6,894			21,336
	Other liabilities				13,687			—

			Total current liabilities		128,033			128,502

Deferred compensation					3,059			2,610
Deferred income taxes					10,249			9,349
Excess of fair value of acquired net assets over cost, net					—			4,913
Stockholders' equity
	Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued				—			—
	Class A Common Stock, $.01 par value (1 vote per share); 120,000,000 shares authorized; 41,068,227 shares issued at June 28, 2002 and 40,487,893 shares at December 31, 2001				411			405
	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; 7,711,185 shares issued and outstanding at June 28, 2002 and 7,911,185 shares issued and outstanding at December 31, 2001				77			79
	Additional paid-in capital				136,679			125,648
	Deferred compensation				(2,958	)		(3,226	)
	Retained earnings				529,529			510,713
	Accumulated other comprehensive loss				(14,238	)		(9,372	)
	Less treasury stock at cost, 11,157,912 Class A shares at June 28, 2002 and 10,064,847 Class A shares at December 31, 2001				(306,134	)		(265,009	)

			Total stockholders' equity		343,366			359,238

Total liabilities and stockholders' equity				$	484,707		$	504,612

See accompanying notes to condensed consolidated financial statements.

THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

			For the Three Months Ended						For the Six Months Ended
			June 28, 2002			June 29, 2001			June 28, 2002			June 29, 2001
Revenue			$	191,529		$	200,851		$	417,227		$	446,280
Cost of goods sold				105,521			109,069			231,455			245,909

	Gross profit			86,008			91,782			185,772			200,371

Operating expense
	Selling			63,537			60,678			132,784			127,509
	General and administrative			16,499			14,986			33,120			31,094
	Amortization of goodwill			—			271			—			542

		Total operating expense		80,036			75,935			165,904			159,145

Operating income				5,972			15,847			19,868			41,226

Other expense (income)
	Interest expense			189			188			370			260
	Other, net			(1,849	)		(234	)		(2,057	)		(1,460	)

		Total other expense (income)		(1,660	)		(46	)		(1,687	)		(1,200	)

Income before income taxes				7,632			15,893			21,555			42,426

Provision for income taxes				2,709			5,404			7,652			14,425

Net income before cumulative effect of change in accounting principle			$	4,923		$	10,489		$	13,903		$	28,001

Cumulative effect of change in accounting principle				—			—			4,913			—

Net income			$	4,923		$	10,489		$	18,816		$	28,001

Earnings per share before cumulative effect of change in accounting principle
		Basic	$	0.13		$	0.27		$	0.37		$	0.71

		Diluted	$	0.13		$	0.26		$	0.36		$	0.69

Earnings per share after cumulative effect of change in accounting principle
		Basic	$	0.13		$	0.27		$	0.50		$	0.71

		Diluted	$	0.13		$	0.26		$	0.49		$	0.69

Weighted-average shares outstanding
		Basic		37,710			39,276			37,854			39,368

		Diluted		38,652			40,580			38,656			40,849

See accompanying notes to condensed consolidated financial statements.

THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

					For the Six Months Ended
					June 28, 2002			June 29, 2001
Cash flows from operating activities:
	Net income				$	18,816		$	28,001
	Adjustments to reconcile net income to net cash used by operating activities:
		Deferred income taxes				2,171			20
		Depreciation and amortization				10,999			10,661
		Cumulative effect of change in accounting principle				(4,913	)		—
		Tax benefit from stock option plans				3,599			6,530
		Increase (decrease) in cash from changes in working capital items:
			Accounts receivable			23,953			(18,759	)
			Inventory			(31,932	)		(48,266	)
			Prepaid expense			536			(3,203	)
			Accounts payable			(978	)		(2,806	)
			Accrued expense			(2,999	)		(20,153	)
			Income taxes			(14,457	)		(11,918	)

				Net cash provided (used) by operating activities		4,795			(59,893	)

Cash flows from investing activities:
	Additions to property, plant and equipment, net					(6,389	)		(10,695	)
	Other, net					786			(2,117	)

				Net cash used by investing activities		(5,603	)		(12,812	)

Cash flows from financing activities:
	Net borrowings under short-term credit facilities					—			7,700
	Common stock repurchases					(42,398	)		(40,262	)
	Issuance of common stock					8,175			6,924

				Net cash used by financing activities		(34,223	)		(25,638	)

Effect of exchange rate changes on cash						1,649			(1,691	)

Net decrease in cash and equivalents						(33,382	)		(100,034	)
Cash and equivalents at beginning of period						105,658			114,852

Cash and equivalents at end of period					$	72,276		$	14,818

Supplemental disclosure of cash flow information:
	Interest paid				$	267		$	153
	Income taxes paid					16,323			20,158

See accompanying notes to condensed consolidated financial statements.

THE TIMBERLAND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

1.: In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain the adjustments necessary to present fairly the Company's 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 the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K, for the year ended December 31, 2001.
2.: The results of operations for the three and six months ended June 28, 2002 are not necessarily indicative of the results to be expected for the full year. Historically, the Company's revenue has been more heavily weighted to the second half of the year.
3.: Dilutive securities included in the calculation of diluted weighted-average shares were 942,550 and 1,304,245 for the second quarter of 2002 and 2001, respectively, and 801,988 and 1,480,431 for the first six months of 2002 and 2001, respectively. Anti-dilutive securities excluded from the calculation of diluted weighted-average shares were 747,745 and 688,470 for the second quarter of 2002 and 2001, respectively, and 775,695 and 687,970 for the first six months of 2002 and 2001, respectively.
4.: In the second quarter of 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." The Company adopted this standard effective January 1, 2002. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. In addition, SFAS No. 141 requires that any excess of fair value of net assets over cost arising from acquisitions occurring prior to adoption of this statement will be recognized as the cumulative effect of a change in accounting principle. Accordingly, in the first quarter of 2002, the Company recognized a cumulative effect of a change in accounting principle gain of $4,913 ($0.13 per share diluted and basic) for the unamortized balance of the excess of fair value of net assets over cost as of December 31, 2001.
5.: In the second quarter of 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." The Company adopted this standard effective January 1, 2002. SFAS No. 142 requires the cessation of goodwill amortization and, instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. The provisions of this accounting standard require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. The Company has completed that transitional impairment test and has determined that no impairment of reported goodwill has occurred. A reconciliation of net income and earnings per share for the first three and six months of 2002 (after the cumulative effect of a change in accounting principle) to the previously reported

amounts for the comparable periods, adjusted for the exclusion of goodwill amortization and net of the related income tax effect, follows:

	For the Three Months Ended				For the Six Months Ended
	June 28, 2002		June 29, 2001		June 28, 2002		June 29, 2001
Reported net income	$	4,923	$	10,489	$	18,816	$	28,001
Add: goodwill amortization, net of tax		—		179		—		358

Adjusted net income	$	4,923	$	10,668	$	18,816	$	28,359
Reported diluted earnings per share	$	0.13	$	0.26	$	0.49	$	0.69
Add: goodwill amortization, net of tax		—		—		—		—

Adjusted diluted earnings per share	$	0.13	$	0.26	$	0.49	$	0.69
Reported basic earnings per share	$	0.13	$	0.27	$	0.50	$	0.71
Add: goodwill amortization, net of tax		—		—		—	$	0.01

Adjusted basic earnings per share	$	0.13	$	0.27	$	0.50	$	0.72

There were no changes in the carrying amount of goodwill for the period ended June 28, 2002, compared with December 31, 2001.

Information regarding the Company's other intangible assets follows:

				As of June 28, 2002									As of June 29, 2001
				Carrying Amount			Accumulated Amortization			Net			Carrying Amount			Accumulated Amortization			Net
		Trademarks and related expenses		$	6,456		$	(3,103	)	$	3,353		$	5,781		$	(2,946	)	$	2,835

Amortization expense for the second quarter of 2002 and 2001 was $292 and $251, respectively, and $575 and $492 for the first six months of 2002 and 2001, respectively. The estimated amortization for existing intangible assets as of June 28, 2002, for each of the five succeeding fiscal years is as follows: 2002: $1,170; 2003: $1,049; 2004: $825; 2005: $569; 2006: $269.

6.: In the normal course of business, the financial position and results of operations of the Company are routinely subject to currency rate movements on non-U.S. dollar denominated assets, liabilities and income as the Company sells goods in local currencies through its foreign subsidiaries. The Company has established policies and business practices to protect against the adverse effect of these exposures. Derivative instruments, specifically forward contracts, are used by the Company in its hedging of forecasted foreign currency transactions, typically for a period not greater than 24 months. Those derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. As of June 28, 2002, the Company had forward contracts maturing at various dates through March, 2004 to buy and sell the equivalent of approximately $213,491 in foreign currencies at contracted rates. As of June 29, 2001, the Company had forward contracts maturing at various dates through 2002 to buy and sell the equivalent of approximately $82,208 in foreign currencies at contracted rates. The increase in the value of contracts held at June 28, 2002, compared with June 29, 2001, is the result of the Company hedging a larger percentage of its foreign currency exposure for the second half of 2002 than was hedged at June 29, 2001 for the second half of 2001. Additionally, the Company has elected to hedge a portion of its forecasted 2003 foreign currency exposure earlier in 2002 than was hedged at June 29, 2001 for 2002, as allowed by the Company's hedging policy. For the quarters ended June 28, 2002 and June 29, 2001, the Company recorded, in its income statement, hedging (losses)/gains of ($2,331) and $2,472, respectively, and for the year to date periods ended June 28, 2002 and June 29, 2001, hedging (losses)/gains of ($709) and $4,635, respectively.

7.: Business segment revenue, income (loss) before income taxes, total assets and goodwill for the three and six months ended June 28, 2002 and June 29, 2001 follow:

For the Three Months Ended June 28, 2002 and June 29, 2001

2002	U.S. Wholesale		U.S. Consumer Direct		International		Unallocated Corporate			Consolidated
Revenue	$	93,266	$	32,613	$	65,650	$	—		$	191,529
Income (loss) before income taxes		22,807		2,796		5,735		(23,706	)		7,632
Total assets		172,686		28,402		144,594		139,025			484,707
Goodwill		6,804		794		6,565		—			14,163
2001
Revenue	$	105,279	$	36,271	$	59,301	$	—		$	200,851
Income (loss) before income taxes		29,781		821		5,111		(19,820	)		15,893
Total assets		220,656		32,963		121,393		75,142			450,154
Goodwill		6,943		810		7,253		—			15,006

For the Six Months Ended June 28, 2002 and June 29, 2001

2002	U.S. Wholesale		U.S. Consumer Direct		International		Unallocated Corporate			Consolidated
Revenue	$	183,531	$	66,999	$	166,697	$	—		$	417,227
Income (loss) before income taxes		45,952		4,368		23,625		(52,390	)		21,555
2001
Revenue	$	225,035	$	71,034	$	150,211	$	—		$	446,280
Income (loss) before income taxes		65,393		629		19,154		(42,750	)		42,426

The 2002 and 2001 goodwill amounts exclude the unamortized balance of the excess of fair value of net assets over cost, as discussed in Note 4. Additionally, total assets for 2001 have been adjusted to reflect the current goodwill allocation method by segment. A discussion of segment revenue and profitability is contained in Management's Discussion and Analysis of Financial Condition and Results of Operations.

8.: Comprehensive income for the three and six months ended June 28, 2002 and June 29, 2001 follows:

	For the Three Months Ended					For the Six Months Ended
	June 28, 2002		June 29, 2001			June 28, 2002		June 29, 2001
Net income	$	4,923	$	10,489		$	18,816	$	28,001
Change in cumulative translation adjustment		6,333		(627	)		5,468