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

FORM 10-Q

Commission File Number 1-9548

The Timberland Company
(Exact name of registrant as specified in its charter)

Registrant's 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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        On May 10, 2004, 29,010,033 shares of the registrant's Class A Common Stock were outstanding and 5,907,632 shares of the registrant's Class B Common Stock were outstanding.

THE TIMBERLAND COMPANY

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE TIMBERLAND COMPANY

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THE TIMBERLAND COMPANY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Per Share Data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THE TIMBERLAND COMPANY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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 Company's ("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 for the year ended December 31, 2003.

Our Summary of Significant Accounting Policies, as described in Footnote 1 in Timberland's Annual Report on Form 10-K for the year ended December 31, 2003, includes disclosure on revenue recognition.

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, in the first quarter of 2004 we recorded approximately $1,200 of reimbursement of shipping expenses within revenues and the related shipping costs within selling expense. In the first quarter of 2003, shipping reimbursements of approximately $1,100 were recorded as an offset to selling expenses. Shipping costs included in selling expense were approximately $4,400 and $3,800 for the first quarters of 2004 and 2003, 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.

Note 2. Historical Financial Results

The results of operations for the three months ended April 2, 2004 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-based Compensation

We apply Accounting Principle Board ("APB") Opinion No. 25 and related interpretations in accounting for our stock plans. We follow 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 consolidated financial statements, no compensation cost has been recognized for stock option grants issued under any of our stock option plans. Had compensation cost for stock option grants

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issued been determined under the fair value method of SFAS No. 123, our net income and diluted earnings per share for the three months ended April 2, 2004 and March 28, 2003 would have been:

The fair value of each stock option granted for the three months ended April 2, 2004 and March 28, 2003 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 the plans: expected volatility of 36.5% and 41.9%; risk-free interest rates of 1.7% and 1.7%; expected lives of 4.5 and 4.5 years; and no dividend payments. The weighted-average fair values per share of stock options granted, exercise price equals market value, for the three months ending April 2, 2004 and March 28, 2003 were $20.39 and $14.18, respectively.

Note 4. Earnings Per Share

Basic earnings per share ("EPS") excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the periods presented. Diluted EPS reflects the potential dilution that would occur if securities such as stock options were exercised. Dilutive securities included in the calculation of diluted weighted-average shares were 910,370 and 674,204 for the three months ended April 2, 2004 and March 28, 2003, respectively. Anti-dilutive securities excluded from the calculation of diluted weighted-average shares were 576,443 and 976,284 for the first quarters of 2004 and 2003, respectively.

Note 5. Goodwill and Other Intangible Assets

Our transitional and annual impairment tests have determined that no impairment of goodwill has occurred.

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Information regarding our other intangible assets follows:

Trademarks and related expenses

Amortization expense for the first quarters of 2004 and 2003 was $339 and $317, respectively. The estimated amortization for existing intangible assets as of April 2, 2004, for each of the five succeeding fiscal years is as follows: 2004: $1,365; 2005: $1,137; 2006: $836; 2007: $507; 2008: $202. The amortization period for trademarks and related expenses is five years.

Note 6. Derivatives

All derivatives entered into by the company are designated as either cash flow or balance sheet hedges. Cash flow hedges are derivative contracts hedging forecasted transactions. Balance sheet hedges are derivatives hedging existing foreign currency assets or liabilities. The fair value of cash flow hedges is recorded in other comprehensive income until the hedged transaction affects earnings. The fair value of balance sheet 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 derivative's 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 on 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 April 2, 2004, we had forward contracts maturing at various dates through April 2005 to sell the equivalent of $178,241 in foreign currencies at contracted rates and to buy the equivalent of $3,639 in foreign currencies at contracted rates. As of March 28, 2003, we had forward contracts maturing at various dates through 2004 to sell the equivalent of $140,807 in foreign currencies at contracted rates and to buy the equivalent of $3,797 in foreign currencies at contracted rates. The increase in the value of the contracts held at April 2, 2004, compared with March 28, 2003, is related to the depreciation of the U.S. Dollar in relation to the Euro, Pound Sterling and the Japanese Yen during 2003 and to growth in our international business.

On April 2, 2004, March 28, 2003 and December 31, 2003, we had $8,740, $9,116 and $16,058 in derivative liabilities, respectively. Those amounts reflect the fair value of our cash flow hedges. The $8,740 derivative liability as of April 2, 2004 represents hedges in place through the first quarter of 2005.

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Note 7. Comprehensive Income

Comprehensive income for the three months ended April 2, 2004 and March 28, 2003 follows:

For the three months ended April 2, 2004 and March 28, 2003, the after tax hedging losses reclassified to earnings were $(2,386) and $(4,350), respectively.

Note 8. Business Segments and Geographic Information

We manage our business in three reportable segments, each sharing similar product, distribution, marketing and economic conditions. 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. 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 and apparel and accessories), independent distributors and licensees.

The Unallocated Corporate component of segment reporting consists primarily of the corporate finance, legal, information services and administrative expenses, United States distribution expenses, a majority of United States marketing expenses and other costs incurred in support of company-wide activities. This segment now includes costs related to worldwide product development, which were previously included in U.S. Wholesale. In the table below, Corporate Unallocated expenses for 2003 increased by $3,744 to reflect this reclassification. Unallocated Corporate also includes other expense/(income), which is primarily interest expense, interest income and other miscellaneous expense/(income). Such expenses are 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 on 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.

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For the Three Months Ended April 2, 2004 and March 28, 2003

Note 9. Inventory

Inventory consists of the following:

Note 10. Restricted Stock Awards and Other

On March 3, 2004 we issued 93,138 restricted shares of Class A Common Stock under the Company's 1997 Incentive Plan, as amended. In July 2003 our Board of Directors approved up to 97,500 shares of Class A Common Stock for performance based programs. The award of these restricted share grants was based on the achievement of specified performance targets for the period from July 1, 2003 through December 31, 2003. These shares are subject to restrictions on sale and transferability, a risk of forfeiture and certain other terms and conditions. These restrictions lapse equally three and four years after the award date.

We accounted for these restricted share grants under the provisions of APB No. 25 and recorded deferred compensation on our balance sheet based upon our achievement of the aforementioned performance targets and the market value per share of our stock on March 3, 2004.

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As of April 2, 2004, we had an outstanding loan receivable of $524 from an officer of the Company, due for payment in the fourth quarter of 2004. The loan is also described in Footnote 16 of our Annual Report on Form 10-K for the year ended December 31, 2003.

Note 11. Income Taxes

        The effective tax rate for the three months ended April 2, 2004 and March 28, 2003 was 35.5% and 35.0%, respectively.

Note 12. Share Repurchase

On May 16, 2002, our Board of Directors approved an additional repurchase of up to 4,000,000 shares of our Class A Common Stock. We have repurchased 3,706,275 shares under this authorization. On September 23, 2003, our Board of Directors approved an additional repurchase of up to 4,000,000 shares of our Class A Common Stock. We may use repurchased shares to offset future issuances under the Company's stock-based employee incentive plans or for other purposes. From time to time, we use Rule 10b5-1 plans to facilitate share repurchases.

Note 13. 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 14. Subsequent Event

On April 30, 2004, we entered into an amended and restated unsecured committed revolving credit agreement with a group of banks, effective until April 30, 2007 ("Agreement"). Prior to April 30, 2006, we may elect to extend the final maturity date to April 30, 2008. The new Agreement provides for $200,000 of committed borrowings, of which up to $125,000 may be used for letters of credit. Upon consent of the bank group, we may increase the committed borrowing limit by $50,000 for a total commitment of $250,000. Under the terms of the Agreement, we may borrow at interest rates based on eurodollar rates (approximately 1.0% at April 30, 2004), plus an applicable margin based on a fixed-charge coverage grid of between 50 and 100 basis points that is adjusted quarterly. As of April 30, 2004, 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 quarterly. As of April 30, 2004, 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.

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Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discusses The Timberland Company's ("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 consolidated financial statements and related notes. Included is a discussion and reconciliation of total Company and International revenue growth to constant dollar revenue growth. Constant dollar revenue growth, which excludes the impact of changes in foreign exchange rates, is not a Generally Accepted Accounting Principle ("GAAP") performance measure. It is used by the Company in its analysis of its financial condition and results of operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our 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 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 Company's consolidated financial statements of our Form 10-K for the year ended December 31, 2003. Our estimates, assumptions and judgments involved in applying the critical accounting policies are described in the Management's Discussion and Analysis of Financial Conditions and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2003.

Overview

Our strategy centers on expanding the penetration of the Timberland® brand among the growing number of consumers who choose to pursue an outdoor-inspired lifestyle. To achieve this objective we offer an integrated product selection of footwear, apparel and accessories that reinforces the functional performance benefits and classic styling that consumers have come to expect from the Timberland brand. We sell these products through high quality distribution channels, including our own retail stores.

To deliver against our long-term goals, we are focused on driving progress on key strategic fronts. These include enhancing our leadership position in footwear, capturing growth opportunities in outdoor-inspired apparel, extending brand reach through development of the Timberland PRO® series and brand building licensing arrangements, expanding geographically and driving operational and financial excellence while setting the standard for commitment to the community.

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Highlights of our first quarter of 2004 financial performance include the following:

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Revenues increased 18.7% to $321.8 million, driven by 9.0% growth in our U.S. business and 28.7% growth in our international operations.



•

Operating profits increased 61.7% to $47.8 million.



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Operating margins increased from 10.9% to 14.8%, driven by strong gross margin gains which more than offset increases in operating expenses as a percent of sales, reflecting investments against strategic growth priorities.



•

Net income increased 61.1% to $31.1 million.



•

Diluted earnings per share increased by 64.2% from $0.53 to $0.87, reflecting profit gains and continued benefits from share repurchases. In the first quarter of 2004, we repurchased 333 thousand shares of our Class A Common Stock.



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Cash at the end of the quarter was $160.6 million with no debt outstanding.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 2, 2004 AND MARCH 28, 2003

Revenue

Consolidated revenue growth of 18.7% in the first quarter of 2004 reflected strong growth in our international business, benefits from foreign currency exchange rate changes and solid gains in our U.S. business. Revenue from the U.S. business totaled $149.1 million in the first quarter of 2004, up 9.0% over the prior period. International revenues were $172.7 million, 28.7% ahead of the first quarter of 2003, or 14.6% in constant dollars. Overall, changes in currency exchange rates were responsible for 7.0% of consolidated revenue growth.

Segments Review

We have three reportable business segments (see Note 8): U.S. Wholesale, U.S. Consumer Direct and International.

Revenues for our U.S. Wholesale business increased 7.1% to $111.3 million. Growth in our women's casual, kids', boots and outdoor performance footwear categories was