Attached files
file | filename |
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EX-10.1 - EX-10.1 - TIMBERLAND CO | b80536exv10w1.htm |
EX-32.2 - EX-32.2 - TIMBERLAND CO | b80536exv32w2.htm |
EX-31.1 - EX-31.1 - TIMBERLAND CO | b80536exv31w1.htm |
EX-32.1 - EX-32.1 - TIMBERLAND CO | b80536exv32w1.htm |
EX-31.2 - EX-31.2 - TIMBERLAND CO | b80536exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 2, 2010
OR
__ | 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
Delaware
|
02-0312554 | |||
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.) | |||
incorporation or organization) |
||||
200 Domain Drive, Stratham, New Hampshire
|
03885 | |||
(Address of principal executive offices)
|
(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.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule
12b-2 of the Exchange Act.
12b-2 of the Exchange Act.
Large Accelerated Filer x
|
Accelerated Filer o | |
Non-Accelerated Filer o (Do not check if a smaller reporting company)
|
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
On
April 30, 2010, 42,708,328 shares of the registrants Class A Common Stock were outstanding and
10,889,160 shares of the registrants Class B Common Stock were outstanding.
THE TIMBERLAND COMPANY
FORM 10-Q
TABLE OF CONTENTS
Page(s) | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7-19 | ||||||||
19-27 | ||||||||
27 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
Exhibits |
33-41 | |||||||
EX-10.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
Table of Contents
Form 10-Q
Page 2
Page 2
Cautionary Note Regarding Forward-Looking Statements
The Timberland Company (the Company) wishes to take advantage of The Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, which provide
a safe harbor for certain written and oral forward-looking statements to encourage companies to
provide prospective information. Prospective information is based on managements then current
expectations or forecasts. Such information is subject to the risk that such expectations or
forecasts, or the assumptions used in making such expectations or forecasts, may become inaccurate.
The discussion in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year
ended December 31, 2009 (the Form 10-K) and Part II, Item 1A, Risk Factors, of this Quarterly
Report on Form 10-Q identifies important factors that could affect the Companys actual results and
could cause such results to differ materially from those contained in forward-looking statements
made by or on behalf of the Company. The risks included in Part I, Item 1A, Risk Factors, of the
Form 10-K and Part II, Item 1A of this Quarterly Report are not exhaustive. Other sections of the
Form 10-K as well as this Quarterly Report may include additional factors which could adversely
affect the Companys business and financial performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time to time and it is
not possible for management to predict all such risk factors, nor can it assess the impact of all
such risk factors on the Companys business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking Information
As discussed above and in Part I, Item 1A, Risk Factors, of the Form 10-K and Part II, Item 1A of
this Quarterly Report, investors should be aware of certain risks, uncertainties and assumptions
that could affect our actual results and could cause such results to differ materially from those
contained in forward-looking statements made by or on behalf of us. Statements containing the
words may, assumes, forecasts, positions, predicts, strategy, will, expects,
estimates, anticipates, believes, projects, intends, plans, budgets, potential,
continue, target and variations thereof, and other statements contained in this Quarterly
Report regarding matters that are not historical facts are forward-looking statements. Such
statements are based on current expectations only and actual future results may differ materially
from those expressed or implied by such forward-looking statements due to certain risks,
uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not
limited to:
Our ability to successfully market and sell our products in a highly competitive industry
and in view of changing consumer trends and preferences, consumer acceptance of products, and other
factors affecting retail market conditions, including the current global economic environment and
global political uncertainties resulting from the continuing war on terrorism;
Our ability to execute key strategic initiatives;
Our ability to adapt to potential changes in duty structures in countries of import and
export, including anti-dumping measures imposed by the European Union with respect to leather
footwear imported from China and Vietnam;
Our ability to manage our foreign exchange rate risks, and taxes, duties, import
restrictions and other risks related to doing business internationally;
Our ability to locate and retain independent manufacturers to produce lower cost,
high-quality products with rapid turnaround times;
Our reliance on a limited number of key suppliers and a global supply chain;
Table of Contents
Form 10-Q
Page 3
Page 3
Our ability to obtain adequate materials at competitive prices;
Our reliance on the financial health of, and the appeal of our products to, our customers;
Our reliance on the financial stability of third parties with which we do business,
including customers, suppliers and distributors;
Our ability to successfully invest in our infrastructure and products based upon advance
sales forecasts;
Our ability to recover our investment in, and expenditures of, our retail organization
through adequate sales at such retail locations; and
Our ability to respond to actions of our competitors, some of whom have substantially
greater resources than we have.
We undertake no obligation to update publicly any forward-looking statements, whether as a result
of new information, future events or otherwise.
Table of Contents
Form 10-Q
Page 4
Page 4
Part I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
April 2, | December 31, | April 3, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
Assets |
||||||||||||
Current assets |
||||||||||||
Cash and equivalents |
$238,540 | $289,839 | $159,195 | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $12,299
at April 2, 2010, $12,175 at December 31, 2009 and $13,239 at April
3, 2009 |
157,615 | 149,178 | 172,280 | |||||||||
Inventory, net |
136,941 | 158,541 | 162,783 | |||||||||
Prepaid expense |
29,374 | 32,863 | 37,576 | |||||||||
Prepaid income taxes |
14,389 | 11,793 | 16,752 | |||||||||
Deferred income taxes |
24,448 | 26,769 | 21,974 | |||||||||
Derivative assets |
5,444 | 1,354 | 4,886 | |||||||||
Total current assets |
606,751 | 670,337 | 575,446 | |||||||||
Property, plant and equipment, net |
66,245 | 69,820 | 74,576 | |||||||||
Deferred income taxes |
15,379 | 14,903 | 17,204 | |||||||||
Goodwill |
44,353 | 44,353 | 43,870 | |||||||||
Intangible assets, net |
44,648 | 45,532 | 46,512 | |||||||||
Other assets, net |
13,652 | 14,962 | 10,423 | |||||||||
Total assets |
$791,028 | $859,907 | $768,031 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||
Current liabilities |
||||||||||||
Accounts payable |
$44,265 | $79,911 | $56,159 | |||||||||
Accrued expense |
||||||||||||
Payroll and related |
21,509 | 43,512 | 18,966 | |||||||||
Other |
66,913 | 81,988 | 61,309 | |||||||||
Income taxes payable |
20,279 | 21,959 | 17,841 | |||||||||
Deferred income taxes |
261 | 48 | 184 | |||||||||
Derivative liabilities |
60 | 389 | 1,212 | |||||||||
Total current liabilities |
153,287 | 227,807 | 155,671 | |||||||||
Other long-term liabilities |
37,796 | 36,483 | 33,398 | |||||||||
Commitments and contingencies |
||||||||||||
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; 74,872,066 shares issued at April 2, 2010, 74,570,388
shares issued at December 31, 2009 and 73,997,343 shares issued at April 3,
2009 |
749 | 746 | 740 | |||||||||
Class B Common Stock, $.01 par value (10 votes per share); convertible
into Class A shares on a one-for-one basis; 20,000,000 shares authorized;
10,889,160 shares issued and outstanding at April 2, 2010, 11,089,160 shares
issued and outstanding at December 31, 2009 and 11,529,160 shares issued and
outstanding at April 3, 2009 |
109 | 111 | 115 | |||||||||
Additional paid-in capital |
268,982 | 266,457 | 261,901 | |||||||||
Retained earnings |
1,000,430 | 974,683 | 933,916 | |||||||||
Accumulated other comprehensive income |
11,572 | 15,048 | 7,635 | |||||||||
Treasury Stock at cost; 32,177,071 Class A shares at April 2, 2010,
31,131,253 Class A shares at December 31, 2009 and 28,685,386 Class A shares
at
April 3, 2009 |
(681,897 | ) | (661,428 | ) | (625,345 | ) | ||||||
Total stockholders equity |
599,945 | 595,617 | 578,962 | |||||||||
Total liabilities and stockholders equity |
$791,028 | $859,907 | $768,031 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Table of Contents
Form 10-Q
Page 5
Page 5
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
For the Quarter Ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Revenue |
$317,042 | $296,648 | ||||||
Cost of goods sold |
159,059 | 159,959 | ||||||
Gross profit |
157,983 | 136,689 | ||||||
Operating expense |
||||||||
Selling |
92,696 | 92,268 | ||||||
General and administrative |
25,899 | 25,417 | ||||||
Impairment of intangible asset |
- | 925 | ||||||
Restructuring |
- | (104 | ) | |||||
Total operating expense |
118,595 | 118,506 | ||||||
Operating income |
39,388 | 18,183 | ||||||
Other income/(expense), net |
||||||||
Interest income |
74 | 440 | ||||||
Interest expense |
(140 | ) | (121 | ) | ||||
Other, net |
(133 | ) | (663 | ) | ||||
Total other income/(expense), net |
(199 | ) | (344 | ) | ||||
Income before provision for income taxes |
39,189 | 17,839 | ||||||
Provision for income taxes |
13,442 | 1,962 | ||||||
Net income |
$25,747 | $15,877 | ||||||
Earnings per share |
||||||||
Basic |
$ .48 | $ .28 | ||||||
Diluted |
$ .47 | $ .27 | ||||||
Weighted-average shares outstanding |
||||||||
Basic |
54,166 | 57,108 | ||||||
Diluted |
54,643 | 57,802 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Table of Contents
Form 10-Q
Page 6
Page 6
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Quarter Ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$25,747 | $15,877 | ||||||
Adjustments to reconcile net income to net cash used by operating activities: |
||||||||
Deferred income taxes |
1,352 | 2,215 | ||||||
Share-based compensation |
1,558 | 811 | ||||||
Depreciation and other amortization |
6,545 | 7,141 | ||||||
Provision for losses on accounts receivable |
1,468 | 1,912 | ||||||
Impairment of intangible asset |
- | 925 | ||||||
Tax benefit/(expense) from share-based compensation, net of excess benefit |
(55 | ) | (295 | ) | ||||
Unrealized (gain)/loss on derivatives |
(163 | ) | 34 | |||||
Other non-cash charges/(credits), net |
(258 | ) | 828 | |||||
Increase/(decrease) in cash from changes in operating assets and
liabilities, net of the effect of business combinations: |
||||||||
Accounts receivable |
(13,003 | ) | (7,925 | ) | ||||
Inventory |
20,618 | 16,656 | ||||||
Prepaid expense and other assets |
3,723 | (1,652 | ) | |||||
Accounts payable |
(37,065 | ) | (40,269 | ) | ||||
Accrued expense |
(34,145 | ) | (31,261 | ) | ||||
Prepaid income taxes |
(2,596 | ) | (65 | ) | ||||
Income taxes payable |
(325 | ) | (9,040 | ) | ||||
Other liabilities |
284 | (201 | ) | |||||
Net cash used by operating activities |
(26,315 | ) | (44,309 | ) | ||||
Cash flows from investing activities: |
||||||||
Acquisition of business, net of cash acquired |
- | (1,516 | ) | |||||
Additions to property, plant and equipment |
(2,818 | ) | (2,838 | ) | ||||
Other |
23 | (61 | ) | |||||
Net cash used by investing activities |
(2,795 | ) | (4,415 | ) | ||||
Cash flows from financing activities: |
||||||||
Common stock repurchases |
(19,512 | ) | (9,127 | ) | ||||
Issuance of common stock |
719 | 670 | ||||||
Excess tax benefit from share-based compensation |
303 | 99 | ||||||
Other |
(451 | ) | (170 | ) | ||||
Net cash used by financing activities |
(18,941 | ) | (8,528 | ) | ||||
Effect of exchange rate changes on cash and equivalents |
(3,248 | ) | (742 | ) | ||||
Net decrease in cash and equivalents |
(51,299 | ) | (57,994 | ) | ||||
Cash and equivalents at beginning of period |
289,839 | 217,189 | ||||||
Cash and equivalents at end of period |
$238,540 | $159,195 | ||||||
Supplemental disclosures of cash flow information: |
||||||||
Interest paid |
$173 | $156 | ||||||
Income taxes paid |
$14,484 | $8,311 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Table of Contents
Form 10-Q
Page 7
Page 7
THE TIMBERLAND COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of The Timberland
Company and its subsidiaries (we, our, us, its, Timberland or the Company). These
unaudited condensed consolidated financial statements should be read in conjunction with our
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2009.
The financial statements included in this Quarterly Report on Form 10-Q are unaudited, but in the
opinion of management, such financial statements include the adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Companys financial position, results of
operations and changes in cash flows for the interim periods presented. The results reported in
these financial statements are not necessarily indicative of the results that may be expected for
the full year due, in part, to seasonal factors. Historically, our revenue has been more heavily
weighted to the second half of the year.
The Companys fiscal quarters end on the Friday closest to the day on which the calendar quarter
ends, except that the fourth quarter and fiscal year end on December 31. The first quarters of our
fiscal year in 2010 and 2009 ended on April 2, 2010 and April 3, 2009, respectively.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2010-06 (ASU No. 2010-06), Improving Disclosures About Fair Value Measurements. This
accounting standard update adds new requirements for fair value measurement disclosures about
transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value
disclosures about the level of disaggregation and about inputs and valuation techniques used to
measure fair value. ASU No. 2010-06 was effective for the Company beginning January 1, 2010 and
its adoption did not have a material impact on the Companys existing disclosures.
Note 2. Fair Value Measurements
ASC 820 establishes a fair value hierarchy that ranks the quality and reliability of the
information used to determine fair value. In general, fair values determined by Level 1 inputs
utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the
Company has the ability to access. Fair values determined by Level 2 inputs utilize data points
that are observable such as quoted prices, interest rates and yield curves. Level 3 inputs are
unobservable data points for the asset or liability, and include situations where there is little,
if any, market activity for the asset or liability. The Company recognizes and reports significant
transfers between Level 1 and Level 2, and into and out of Level 3, as of the actual date of the
event or change in circumstances that caused the transfer.
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Form 10-Q
Page 8
Page 8
The following tables present information about our assets and liabilities measured at fair value on
a recurring basis as of April 2, 2010 and December 31, 2009:
Description | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Impact of Netting | April 2, 2010 | ||||||||||||||||
Assets: |
||||||||||||||||||||
Cash equivalents: |
||||||||||||||||||||
Time deposits |
$ | - | $ | 65,006 | $ | - | $ | - | $ | 65,006 | ||||||||||
Mutual funds |
$ | - | $ | 55,776 | $ | - | $ | - | $ | 55,776 | ||||||||||
Foreign exchange forward contracts: |
||||||||||||||||||||
Derivative assets |
$ | - | $ | 5,464 | $ | - | $ | (20) | $ | 5,444 | ||||||||||
Cash surrender value
of life insurance |
$ | - | $ | 7,478 | $ | - | $ | - | $ | 7,478 | ||||||||||
Liabilities: |
||||||||||||||||||||
Foreign exchange forward contracts: |
||||||||||||||||||||
Derivative liabilities |
$ | - | $ | 80 | $ | - | $ | (20) | $ | 60 | ||||||||||
Description | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Impact of Netting | December 31, 2009 | ||||||||||||||||
Assets: |
||||||||||||||||||||
Cash equivalents |
||||||||||||||||||||
Time deposits |
$ | - | $ | 70,041 | $ | - | $ | - | $ | 70,041 | ||||||||||
Mutual funds |
$ | - | $ | 95,871 | $ | - | $ | - | $ | 95,871 | ||||||||||
Foreign exchange forward contracts: |
||||||||||||||||||||
Derivative assets |
$ | - | $ | 1,768 | $ | - | $ | (230) | $ | 1,538 | ||||||||||
Cash surrender value
of life insurance |
$ | - | $ | 8,036 | $ | - | $ | - | $ | 8,036 | ||||||||||
Liabilities: |
||||||||||||||||||||
Foreign exchange forward contracts: |
||||||||||||||||||||
Derivative liabilities |
$ | - | $ | 621 | $ | - | $ | (230) | $ | 391 |
Cash equivalents, included in cash and equivalents on our unaudited condensed consolidated balance
sheet, include money market mutual funds and time deposits, placed with a variety of high credit
quality financial institutions. Time deposits are valued based on current interest rates and
mutual funds are valued at the net asset value of the fund. The carrying values of accounts
receivable and accounts payable approximate their fair values due to their short-term maturities.
The fair value of the derivative contracts in the table above is reported on a gross basis by level
based on the fair value hierarchy with a corresponding adjustment for netting for financial
statement presentation purposes, where appropriate. The Company often enters into derivative
contracts with a single counterparty and certain of these contracts are covered under a master
netting agreement. The fair values of our foreign currency forward contracts are based on quoted
market prices or pricing models using current market rates. As of December 31, 2009, the
derivative contracts above include $184 of assets and $2 of liabilities included in other
assets, net and other long-term liabilities, respectively, on our unaudited condensed consolidated
balance sheet.
Table of Contents
Form 10-Q
Page 9
Page 9
The cash surrender value of life insurance represents insurance contracts held as assets in a rabbi
trust to fund the Companys deferred compensation plan. These assets are included in other assets,
net on our
unaudited condensed consolidated balance sheet. The cash surrender value of life insurance is
based on the net asset values of the underlying funds available to plan participants.
On an ongoing basis, the Company evaluates the carrying value of the GoLite trademark, which is
licensed to a third party, for events or changes in circumstances indicating the carrying value of
the asset may not be recoverable. Factors considered include the ability of the licensee to obtain
necessary financing, the impact of changes in economic conditions and an assessment of the
Companys ability to recover all contractual payments when due under the licensing arrangement.
During the first quarter of 2009, using Level 3 input factors noted above, the Company determined
that the carrying value of the GoLite trademark was impaired and recorded a pre-tax non-cash charge
of approximately $925, which reduced the carrying value of the trademark to zero at April 3,
2009. The charge is reflected in our Europe segment.
Note 3. Derivatives
In the normal course of business, the financial position and results of operations of the Company
are impacted by currency rate movements in foreign currency denominated assets, liabilities and
cash flows as we purchase and sell goods in local currencies. We have established policies and
business practices that are intended to mitigate a portion of the effect of these exposures. We
use derivative financial instruments, specifically forward contracts, to manage our currency
exposures. These derivative instruments are viewed as risk management tools and are not used for
trading or speculative purposes. Derivatives entered into by the Company are either designated as
cash flow hedges of forecasted foreign currency transactions or are undesignated economic hedges of
existing intercompany assets and liabilities, certain third party assets and liabilities, and
non-US dollar-denominated cash balances.
Derivative instruments expose us to credit and market risk. The market risk associated with these
instruments resulting from currency exchange movements is expected to offset the market risk of the
underlying transactions being hedged. We do not believe there is a significant risk of loss in the
event of non-performance by the counterparties associated with these instruments because these
transactions are executed with a group of major financial institutions and have varying maturities
through January 2011. As a matter of policy, we enter into these contracts only with
counterparties having a minimum investment-grade or better credit rating. Credit risk is managed
through the continuous monitoring of exposures to such counterparties.
Cash Flow Hedges
The Company principally uses foreign currency forward contracts as cash flow hedges to offset a
portion of the effects of exchange rate fluctuations on certain of its forecasted foreign currency
denominated sales transactions. The Companys cash flow exposures include anticipated foreign
currency transactions, such as foreign currency denominated sales, costs, expenses and
inter-company charges, as well as collections and payments. The risk in these exposures is the
potential for losses associated with the remeasurement of non-functional currency cash flows into
the functional currency. The Company has a hedging program to aid in mitigating its foreign
currency exposures and to decrease the volatility in earnings. Under this hedging program, the
Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures
and recognizes any hedge ineffectiveness in earnings. A hedge is effective if the changes in the
fair value of the derivative provide offset of at least 80 percent and not more than 125 percent of
the changes in the fair value or cash flows of the hedged item attributable to the risk being
hedged. The Company uses regression analysis to assess the effectiveness of a hedge relationship.
Forward contracts designated as cash flow hedging instruments are recorded in our unaudited
condensed consolidated balance sheet at fair value. The effective portion of gains and losses
resulting from changes in the fair value of these hedge instruments are deferred in accumulated
other comprehensive income (OCI) and reclassified to earnings, in cost of goods sold, in the
period that the hedged transaction is
Table of Contents
Form 10-Q
Page 10
Page 10
recognized in earnings. Hedge ineffectiveness is evaluated
using the hypothetical derivative method, and the ineffective portion of the hedge is reported in
our unaudited condensed consolidated statement of operations in other, net. The amount of hedge
ineffectiveness reported in other, net for the quarters ended April 2, 2010 and April 3, 2009 was
not material.
As of April 2, 2010, we had forward contracts maturing at various dates through January 2011 to
sell the equivalent of $103,911 in foreign currencies at contracted rates. As of December 31,
2009, we had forward contracts maturing at various dates through January 2011 to sell the
equivalent of $101,138 in foreign currencies at contracted rates. As of April 3, 2009, we had
forward contracts maturing at various dates through January 2010 to sell the equivalent of
$104,532 in foreign currencies at contracted rates. The contract amount represents the net
amount of all purchase and sale contracts of a foreign currency.
Notional Amount | ||||||||||||
Currency |
April 2, 2010 | December 31, 2009 | April 3, 2009 | |||||||||
Pound Sterling |
$22,093 | $20,657 | $19,198 | |||||||||
Euro |
64,743 | 64,398 | 63,824 | |||||||||
Japanese Yen |
17,075 | 16,083 | 21,510 | |||||||||
Total |
$103,911 | $101,138 | $104,532 | |||||||||
Other Derivative Contracts
We also enter into derivative contracts to manage foreign currency exchange risk on intercompany
accounts receivable and payable, third-party accounts receivable and payable, and non-U.S.
dollar-denominated cash balances using forward contracts. These forward contracts, which are
undesignated hedges of economic risk, are recorded at fair value on the balance sheet, with changes
in the fair value of these instruments recognized in earnings immediately. The gains or losses
related to the contracts largely offset the remeasurement of those assets and liabilities.
As of April 2, 2010, we had forward contracts maturing at various dates through July 2010 to sell
the equivalent of $48,645 in foreign currencies at contracted rates and to buy the equivalent
of $(30,490) in foreign currencies at contracted rates. As of December 31, 2009, we had
forward contracts maturing at various dates through April 2010 to sell the equivalent of
$44,293 in foreign currencies at contracted rates and to buy the equivalent of $(22,572) in
foreign currencies at contracted rates. As of April 3, 2009, we had forward contracts maturing at
various dates through July 2009 to sell the equivalent of $49,596 in foreign currencies at
contracted rates and to buy the equivalent of $(24,705) in foreign currencies at contracted
rates. The contract amount represents the net amount of all purchase and sale contracts of a
foreign currency.
Notional Amount | ||||||||||||
Currency |
April 2, 2010 | December 31, 2009 | April 3, 2009 | |||||||||
Pound Sterling |
$(18,873 | ) | $(12,922 | ) | $(15,985 | ) | ||||||
Euro |
11,310 | 14,122 | 13,053 | |||||||||
Japanese Yen |
11,721 | 8,013 | 17,071 | |||||||||
Canadian Dollar |
6,439 | 8,204 | 6,661 | |||||||||
Norwegian Kroner |
4,779 | 2,335 | 1,971 | |||||||||
Swedish Krona |
2,779 | 1,969 | 2,120 | |||||||||
Total |
$18,155 | $21,721 | $24,891 | |||||||||
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Form 10-Q
Page 11
Page 11
Fair Value of Derivative Instruments
The following table summarizes the fair values and presentation in the unaudited condensed
consolidated balance sheets for derivatives, which consist of foreign exchange forward contracts,
as of April 2, 2010, December 31, 2009 and April 3, 2009:
Asset
Derivatives |
Liability
Derivatives |
|||||||||||||||||||||||
Fair
Value |
Fair Value |
|||||||||||||||||||||||
April 2, | December 31, | April 3, | April 2, | December 31, | April 3, | |||||||||||||||||||
Balance Sheet Location | 2010 | 2009 | 2009 | 2010 | 2009 | 2009 | ||||||||||||||||||
Derivatives designated as
hedge instruments: |
||||||||||||||||||||||||
Derivative assets |
$ | 5,246 | $ | 1,313 | $ | 4,803 | $ | 20 | $ | 224 | $ | 75 | ||||||||||||
Derivative liabilities |
- | 6 | - | 7 | 335 | 1,068 | ||||||||||||||||||
Other assets, net |
- | 184 | - | - | - | - | ||||||||||||||||||
Other long-term liabilities |
- | - | - | - | 2 | - | ||||||||||||||||||
$ | 5,246 | $ | 1,503 | $ | 4,803 | $ | 27 | $ | 561 | $ | 1,143 | |||||||||||||
Derivatives not designated
as hedge instruments: |
||||||||||||||||||||||||
Derivative assets |
$218 | $265 | $ | 170 | $ | - | $ | - | $ | 12 | ||||||||||||||
Derivative liabilities |
- | - | - | 53 | 60 | 144 | ||||||||||||||||||
$218 | $265 | $ | 170 | $ | 53 | $ | 60 | $ | 156 | |||||||||||||||
Total derivatives |
$ | 5,464 | $ | 1,768 | $ | 4,973 | $ | 80 | $ | 621 | $ | 1,299 | ||||||||||||
The Effect of Derivative Instruments on the Statements of Operations for the Quarters Ended
April 2, 2010 and April 3, 2009
Amount of Gain/(Loss) |
||||||||||||||||||||
Amount of Gain/(Loss) | Location of Gain/(Loss) | Reclassified from | ||||||||||||||||||
Recognized in OCI on | Reclassified from | Accumulated OCI into | ||||||||||||||||||
Derivatives in | Derivatives, Net of Taxes | Accumulated OCI into | Income | |||||||||||||||||
Cash Flow | (Effective Portion) | Income | (Effective Portion) | |||||||||||||||||
Hedging Relationships | 2010 | 2009 | (Effective Portion) | 2010 | 2009 | |||||||||||||||
Foreign exchange forward contracts |
$ | 4,958 | $ | 3,477 | Cost of goods sold | $ | 1,333 | $ | 7,316 |
The Company expects to reclassify pre-tax gains of $5,218 to the income statement within the
next twelve months.
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Form 10-Q
Page 12
Page 12
Amount of Gain/(Loss) | ||||||||||||
Recognized in | ||||||||||||
Derivatives not Designated | Location of Gain/(Loss) Recognized | Income on Derivatives | ||||||||||
as Hedging Instruments | In Income on Derivatives | 2010 | 2009 | |||||||||
Foreign exchange forward contracts |
Other, net | $ | (2,167 | ) | $ | 2,424 |
Note 4. Share-Based Compensation
Share-based compensation costs were recorded in Cost of goods sold, Selling expense and General and
administrative expense as follows for the quarters ended April 2, 2010 and April 3, 2009,
respectively:
For the Quarter Ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Cost of goods sold |
$82 | $89 | ||||||
Selling expense |
499 | 468 | ||||||
General and administrative expense |
977 | 254 | ||||||
Total share-based compensation |
$1,558 | $811 | ||||||
Long Term Incentive Programs
2010 Executive Long Term Incentive Program
On March 3, 2010, the Management Development and Compensation Committee of the Board of Directors approved the terms of The Timberland Company 2010 Executive Long Term Incentive Program (2010 LTIP) with respect to equity awards to be made to certain of the Companys executives and employees. On March 4, 2010, the Board of Directors also approved the 2010 LTIP with respect to the Companys Chief Executive Officer. The 2010 LTIP was established under the Companys 2007 Incentive Plan. The awards are subject to future performance, and consist of performance stock units (PSUs), equal in value to one share of the Companys Class A Common Stock, and performance stock options (PSOs), with an exercise price of $19.45 (the closing price of the Companys Class A Common Stock as quoted on the New York Stock Exchange on March 4, 2010, the date of grant). Shares with respect to the PSUs will be granted and will vest following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The PSOs will vest in three equal annual installments following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The payout of the performance awards will be based on the Companys achievement of certain levels of revenue growth and earnings before interest, taxes, depreciation and amortization (EBITDA), with threshold, budget, target and maximum award levels based upon actual revenue growth and EBITDA of the Company during the applicable performance periods equaling or exceeding such levels. The performance period for the PSUs is the three-year period from January 1, 2010 through December 31, 2012, and the performance period for the PSOs is the twelve-month period from January 1, 2010 through December 31, 2010. No awards shall be made or earned, as the case may be, unless the threshold goal is attained, and the maximum payout may not exceed 200% of the target award.
On March 3, 2010, the Management Development and Compensation Committee of the Board of Directors approved the terms of The Timberland Company 2010 Executive Long Term Incentive Program (2010 LTIP) with respect to equity awards to be made to certain of the Companys executives and employees. On March 4, 2010, the Board of Directors also approved the 2010 LTIP with respect to the Companys Chief Executive Officer. The 2010 LTIP was established under the Companys 2007 Incentive Plan. The awards are subject to future performance, and consist of performance stock units (PSUs), equal in value to one share of the Companys Class A Common Stock, and performance stock options (PSOs), with an exercise price of $19.45 (the closing price of the Companys Class A Common Stock as quoted on the New York Stock Exchange on March 4, 2010, the date of grant). Shares with respect to the PSUs will be granted and will vest following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The PSOs will vest in three equal annual installments following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The payout of the performance awards will be based on the Companys achievement of certain levels of revenue growth and earnings before interest, taxes, depreciation and amortization (EBITDA), with threshold, budget, target and maximum award levels based upon actual revenue growth and EBITDA of the Company during the applicable performance periods equaling or exceeding such levels. The performance period for the PSUs is the three-year period from January 1, 2010 through December 31, 2012, and the performance period for the PSOs is the twelve-month period from January 1, 2010 through December 31, 2010. No awards shall be made or earned, as the case may be, unless the threshold goal is attained, and the maximum payout may not exceed 200% of the target award.
Table of Contents
Form 10-Q
Page 13
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The maximum number of shares to be awarded with respect to PSUs under the March 4, 2010 grants is
516,400, which, if earned, will be settled in early 2013. Based on current estimates of the
performance metrics, unrecognized compensation expense with respect to the 2010 PSUs was $1,907
as of April 2, 2010. This expense is expected to be recognized over a weighted-average remaining
period of 2.9 years.
The maximum number of shares subject to exercise with respect to PSOs under the March 4, 2010
grants is 720,800, which, if earned, will be settled, subject to the vesting schedule noted above,
in early 2011. Based on current estimates of the performance metrics, unrecognized compensation
expense related to the 2010 PSOs was $1,773 as of April 2, 2010. This expense is expected to
be recognized over a weighted-average remaining period of 2.9 years.
2009 Executive Long Term Incentive Program
On March 4, 2009, the Management Development and Compensation Committee of the Board of Directors approved the terms of The Timberland Company 2009 Executive Long Term Incentive Program (2009 LTIP) with respect to equity awards to be made to certain of the Companys executives and employees. On March 5, 2009, the Board of Directors also approved the 2009 LTIP with respect to the Companys Chief Executive Officer. The 2009 LTIP was established under the Companys 2007 Incentive Plan. The awards are subject to future performance, and consist of PSUs, equal in value to one share of the Companys Class A Common Stock, and PSOs, with an exercise price of $9.34 (the closing price of the Companys Class A Common Stock as quoted on the New York Stock Exchange on March 5, 2009, the date of grant). Shares with respect to the PSUs will be granted and will vest following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The PSOs will vest in three equal annual installments following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The payout of the performance awards will be based on the Companys achievement of certain levels of EBITDA, with threshold, budget, target and maximum award levels based upon actual EBITDA of the Company during the applicable performance periods equaling or exceeding such levels. The performance period for the PSUs is the three-year period from January 1, 2009 through December 31, 2011, and the performance period for the PSOs was the twelve-month period from January 1, 2009 through December 31, 2009. No awards shall be made or earned, as the case may be, unless the threshold goal is attained, and the maximum payout may not exceed 200% of the target award.
On March 4, 2009, the Management Development and Compensation Committee of the Board of Directors approved the terms of The Timberland Company 2009 Executive Long Term Incentive Program (2009 LTIP) with respect to equity awards to be made to certain of the Companys executives and employees. On March 5, 2009, the Board of Directors also approved the 2009 LTIP with respect to the Companys Chief Executive Officer. The 2009 LTIP was established under the Companys 2007 Incentive Plan. The awards are subject to future performance, and consist of PSUs, equal in value to one share of the Companys Class A Common Stock, and PSOs, with an exercise price of $9.34 (the closing price of the Companys Class A Common Stock as quoted on the New York Stock Exchange on March 5, 2009, the date of grant). Shares with respect to the PSUs will be granted and will vest following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The PSOs will vest in three equal annual installments following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The payout of the performance awards will be based on the Companys achievement of certain levels of EBITDA, with threshold, budget, target and maximum award levels based upon actual EBITDA of the Company during the applicable performance periods equaling or exceeding such levels. The performance period for the PSUs is the three-year period from January 1, 2009 through December 31, 2011, and the performance period for the PSOs was the twelve-month period from January 1, 2009 through December 31, 2009. No awards shall be made or earned, as the case may be, unless the threshold goal is attained, and the maximum payout may not exceed 200% of the target award.
The maximum number of shares to be awarded with respect to PSUs under the March 5, 2009 grants is
772,500, which, if earned, will be settled in early 2012. Based on current estimates of the
performance metrics, unrecognized compensation expense with respect to the 2009 PSUs was $1,784
as of April 2, 2010. This expense is expected to be recognized over a weighted-average remaining
period of 1.9 years.
Based on actual performance, the number of shares subject to exercise with respect to PSOs under
the March 5, 2009 grants is 599,619, which shares were settled on March 4, 2010, subject to the
vesting schedule noted above.
The Company estimates the fair value of its PSOs on the date of grant using the Black-Scholes
option valuation model, which employs the following assumptions:
2010 LTIP | 2009 LTIP | |||||||
For the Quarter | For the Quarter | |||||||
Ended April 2, | Ended April 3, | |||||||
2010 | 2009 | |||||||
Expected volatility |
47.6 | % | 41.8 | % | ||||
Risk-free interest rate |
2.7 | % | 1.9 | % | ||||
Expected life (in years) |
6.2 | 6.5 | ||||||
Expected dividends |
- | - |
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Form 10-Q
Page 14
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The following summarizes activity associated with stock options earned under the Companys
2009 LTIP and excludes the performance-based awards noted above under the 2010 LTIP for which
performance conditions have not been met:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Term | Value | |||||||||||||
Outstanding at January 1, 2010 |
- | $ | - | |||||||||||||
Settled |
599,619 | 9.52 | ||||||||||||||
Exercised |
- | - | ||||||||||||||
Expired or forfeited |
(9,548 | ) | 9.34 | |||||||||||||
Outstanding at April 2, 2010 |
590,071 | $ | 9.53 | 8.9 | $ | 7,071 | ||||||||||
Vested or expected to vest at
April 2, 2010 |
526,983 | $ | 9.51 | 8.9 | $ | 6,322 | ||||||||||
Exercisable at April 2, 2010 |
- | - | - | - | ||||||||||||
Unrecognized compensation expense related to the 2009 PSOs was $1,389 as of April 2, 2010. This
expense is expected to be recognized over a weighted-average remaining period of 1.9 years.
Stock Options
The Company estimates the fair value of its stock option awards on the date of grant using the
Black-Scholes option valuation model, which employs the assumptions noted in the following table,
for stock option awards excluding awards issued under the Companys Long Term Incentive Programs
discussed above:
For the Quarter Ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Expected volatility |
48.4 | % | 42.4 | % | ||||
Risk-free interest rate |
2.4 | % | 2.1 | % | ||||
Expected life (in years) |
5.0 | 7.5 | ||||||
Expected dividends |
- | - |
The following summarizes transactions under stock option arrangements excluding awards under
the 2009 LTIP, which are summarized above, and the performance-based awards noted above under
the 2010 LTIP for which performance conditions have not been met:
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Page 15
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Term | Value | |||||||||||||
Outstanding at January 1, 2010 |
3,908,270 | $ | 25.05 | |||||||||||||
Granted |
6,000 | 19.45 | ||||||||||||||
Exercised |
(58,347 | ) | 12.33 | |||||||||||||
Expired or forfeited |
(50,336 | ) | 23.46 | |||||||||||||
Outstanding at April 2, 2010 |
3,805,587 | $ | 25.26 | 5.15 | $ | 7,701 | ||||||||||
Vested or expected to vest at
April 2, 2010 |
3,771,399 | $ | 25.37 | 5.11 | $ | 7,434 | ||||||||||
Exercisable at April 2, 2010 |
3,347,103 | $ | 26.89 | 4.65 | $ | 3,927 | ||||||||||
Unrecognized compensation expense related to nonvested stock options was $1,492 as of April 2,
2010. This expense is expected to be recognized over a weighted-average remaining period of 1.4
years.
Nonvested Shares and Restricted Stock Units
Changes in the Companys nonvested shares and restricted stock units, excluding awards under the
Companys Long Term Incentive Programs discussed above, for the quarter ended April 2, 2010 are as
follows:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Stock | Grant Date | Stock | Grant Date | |||||||||||||
Awards | Fair Value | Units | Fair Value | |||||||||||||
Nonvested at January 1, 2010 |
86,102 | $ | 15.59 | 297,758 | $ | 13.74 | ||||||||||
Awarded |
- | - | 2,000 | 19.45 | ||||||||||||
Vested |
(30,061 | ) | 10.25 | (43,331 | ) | 14.70 | ||||||||||
Forfeited |
- | - | (7,327 | ) | 14.48 | |||||||||||
Nonvested at April 2, 2010 |
56,041 | $ | 18.46 | 249,100 | $ | 13.59 | ||||||||||
Expected to vest at April 2, 2010 |
56,041 | $ | 18.46 | 233,311 | $ | 13.57 | ||||||||||
Unrecognized compensation expense related to nonvested restricted stock awards was $131 as of April
2, 2010, and the expense is expected to be recognized over a weighted-average remaining period of
0.8 years. Unrecognized compensation expense related to nonvested restricted stock units was
$1,921 as of April 2, 2010, and the expense is expected to be recognized over a weighted-average
remaining period of 1.3 years.
Note 5. Earnings Per Share (EPS)
Basic EPS excludes common stock equivalents and is computed by dividing net income by the
weighted-average number of common shares outstanding for the periods presented. Diluted EPS
reflects the potential dilution that would occur if potentially dilutive securities such as stock
options were exercised and nonvested shares vested, to the extent such securities would not be
anti-dilutive.
In June 2008, the FASB issued ASC 260-10-45-60 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (ASC 260-10-45-60) which became
effective for the Company beginning January 1, 2009. ASC 260-10-45-60 clarifies that share-based
payment awards that entitle their holders to receive nonforfeitable dividends before vesting,
regardless of whether paid or unpaid, should be considered participating securities and included in
the computation of earnings per share pursuant to the two-class method. The adoption of ASC
260-10-45-60 did not have a material impact on the Companys consolidated financial statements.
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Form 10-Q
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The following is a reconciliation of the number of shares (in thousands) for the basic and diluted
EPS computations for the quarters ended April 2, 2010 and April 3, 2009:
For the Quarter Ended | ||||||||||||||||||||||||
April 2, 2010 | April 3, 2009 | |||||||||||||||||||||||
Weighted- | Per- | Weighted- | Per- | |||||||||||||||||||||
Net | Average | Share | Net | Average | Share | |||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Basic EPS |
$ | 25,747 | 54,166 | $.48 | $ | 15,877 | 57,108 | $.28 | ||||||||||||||||
Effect of dilutive
securities: |
||||||||||||||||||||||||
Stock options and
employee stock
purchase plan
shares |
- | 289 | (.01 | ) | - | 16 | - | |||||||||||||||||
Nonvested shares |
- | 188 | - | - | 678 | (.01 | ) | |||||||||||||||||
Diluted EPS |
$ | 25,747 | 54,643 | $.47 | $ | 15,877 | 57,802 | $.27 | ||||||||||||||||
The following stock options and nonvested shares (in thousands) were outstanding as of April 2,
2010 and April 3, 2009, but were not included in the computation of diluted EPS as their inclusion
would be anti-dilutive:
For the Quarter Ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Anti-dilutive securities |
2,918 | 4,031 |
Note 6. Comprehensive Income
Comprehensive income for the quarters ended April 2, 2010 and April 3, 2009 is as follows:
For the Quarter Ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Net income |
$25,747 | $15,877 | ||||||
Change in cumulative translation adjustment |
(7,478 | ) | (3,770 | ) | ||||
Change in fair value of cash flow hedges, net of taxes |
4,054 | (1,138 | ) | |||||
Change in other adjustments, net of taxes |
(52 | ) | - | |||||
Comprehensive income |
$22,271 | $10,969 | ||||||
The components of accumulated other comprehensive income as of April 2, 2010, December 31,
2009 and April 3, 2009 were:
April 2, 2010 | December 31, 2009 | April 3, 2009 | ||||||||||
Cumulative translation adjustment |
$6,175 | $13,653 | $4,006 | |||||||||
Fair value of cash flow hedges, net
of taxes of $261
at April 2, 2010, $47 at December
31, 2009 and $183
at April 3, 2009 |
4,958 | 904 | 3,491 | |||||||||
Other
adjustments, net of taxes of $99 at April 2, 2010,
$147 at December 31, 2009
and $7 at April 3, 2009 |
439 | 491 | 138 | |||||||||
Total |
$11,572 | $15,048 | $7,635 | |||||||||
Note 7. Business Segments and Geographic Information
The Company has three reportable segments: North America, Europe and Asia. The composition of the
segments is consistent with that used by the Companys chief operating decision maker.
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Page 17
The North America segment is comprised of the sale of products to wholesale and retail customers in
North America. It includes Company-operated specialty and factory outlet stores in the United
States and our United States e-commerce business. This segment also includes royalties from
licensed products sold worldwide, the related management costs and expenses associated with our
worldwide licensing efforts, and certain marketing expenses and value-added services. Beginning in
the first quarter of 2010, results for the North America segment include certain U.S. distribution
expenses, customer operations and service costs, credit management and short-term incentive
compensation costs that were recorded in Unallocated Corporate in prior quarters. These prior
period costs have been reclassified to North America to conform to the current period presentation.
The Europe and Asia segments each consist of the marketing, selling and distribution of footwear,
apparel and accessories outside of the United States. Products are sold outside of the United
States through our subsidiaries (which use wholesale, retail and e-commerce channels to sell
footwear, apparel and accessories), franchisees and independent distributors. Certain distributor
revenue and operating income reflected in our Europe segment in prior periods has been reclassified
to Asia to conform to the current period presentation. Additionally, certain expenses, primarily
related to short-term incentive compensation costs previously reported in Unallocated Corporate,
have been reclassified to Europe and Asia to conform
to the current period presentation.
Unallocated Corporate consists primarily of corporate finance, information services, legal and
administrative expenses, share-based compensation costs, global marketing support expenses,
worldwide product development costs and other costs incurred in support of Company-wide activities.
Unallocated Corporate also includes certain value chain costs such as sourcing and logistics, as
well as inventory variances. Beginning in the first quarter of 2010, certain U.S. distribution
expenses and short-term incentive compensation costs previously reported in Unallocated Corporate
were reclassified to North America, Europe and Asia. Additionally, Unallocated Corporate includes
total other income/(expense), net, which is comprised of interest income, interest expense, and
other, net, which includes foreign exchange gains and losses resulting from changes in the fair
value of financial derivatives not designated as hedges, currency gains and losses incurred on the
settlement of local currency denominated assets and liabilities, and other miscellaneous
non-operating income/(expense). Such income/(expense) is not allocated among the reportable
business segments.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. We evaluate segment performance based on revenue and operating
income. Total assets are disaggregated to the extent that assets apply specifically to a single
segment. Unallocated Corporate assets primarily consist of cash and equivalents, tax assets,
manufacturing/sourcing assets, computers and related equipment, and transportation and distribution
equipment.
For the Quarters Ended April 2, 2010 and April 3, 2009
Unallocated | ||||||||||||||||||||
North America | Europe | Asia | Corporate | Consolidated | ||||||||||||||||
2010 | ||||||||||||||||||||
Revenue |
$121,858 | $151,630 | $43,554 | $ | - | $317,042 | ||||||||||||||
Operating income/(loss) |
21,642 | 37,268 | 6,847 | (26,369 | ) | 39,388 | ||||||||||||||
Income/(loss) before income taxes |
21,642 | 37,268 | 6,847 | (26,568 | ) | 39,189 | ||||||||||||||
Total assets |
214,537 | 328,995 | 61,491 | 186,005 | 791,028 | |||||||||||||||
Goodwill |
36,876 | 7,477 | - | - | 44,353 | |||||||||||||||
2009 |
||||||||||||||||||||
Revenue |
$119,858 | $139,529 | $37,261 | $ | - | $296,648 | ||||||||||||||
Operating income/(loss) |
9,561 | 29,890 | 1,890 | (23,158 | ) | 18,183 | ||||||||||||||
Income/(loss) before income taxes |
9,561 | 29,890 | 1,890 | (23,502 | ) | 17,839 | ||||||||||||||
Total assets |
239,796 | 273,040 | 72,989 | 182,206 | 768,031 | |||||||||||||||
Goodwill |
36,876 | 6,994 | - | - | 43,870 |
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Form 10-Q
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The following summarizes our revenue by product for the quarters ended April 2, 2010 and April 3,
2009:
For the Quarter Ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Footwear |
$ | 225,561 | $ | 211,641 | ||||
Apparel and accessories |
85,689 | 78,664 | ||||||
Royalty and other |
5,792 | 6,343 | ||||||
Total |
$ | 317,042 | $ | 296,648 | ||||
Note 8. Inventory, net
Inventory, net consists of the following:
April 2, 2010 | December 31, 2009 | April 3, 2009 | ||||||||||
Materials |
$ | 8,442 | $ | 7,944 | $ | 7,978 | ||||||
Work-in-process |
1,165 | 740 | 1,189 | |||||||||
Finished goods |
127,334 | 149,857 | 153,616 | |||||||||
Total |
$ | 136,941 | $ | 158,541 | $ | 162,783 | ||||||
Note 9. Acquisition
On March 16, 2009, we acquired 100% of the stock of Glaudio Fashion B.V. (Glaudio) for
approximately $1,500, net of cash acquired. Glaudio operates nine Timberland® retail
stores in the Netherlands and Belgium which sell Timberland® footwear, apparel, leather
goods and product-care products for men, women and kids. The acquisition was effective March 1,
2009, and its results have been included in our Europe segment from the effective date of the
acquisition. The acquisition of Glaudio was not material to the results of operations, financial
position or cash flows of the Company.
Note 10. Income Taxes
In February 2009, the Company received notification that our U.S. federal tax examinations for 2006
and 2007 had been completed. Accordingly, in the first quarter of 2009, we reversed approximately
$6,400 of accruals related to uncertain tax positions.
In December 2009, we received a Notice of Assessment from the Internal Revenue Department of Hong
Kong for approximately $17,600 with respect to the tax years 2004 through 2008. In connection with
the assessment, the Company is required to make payments to the Internal Revenue Department of Hong
Kong totaling approximately $7,500 in the second quarter of 2010. We believe we have a sound
defense to the proposed adjustment and will continue to firmly oppose the assessment. We believe
that the assessment does not impact the level of liabilities for our income tax contingencies.
However, actual resolution may differ from our current estimates, and such differences could have a
material impact on our future effective tax rate and our results of operations.
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Note 11. Stockholders Equity
On March 10, 2008, our Board of Directors approved the repurchase of up to 6,000,000 shares of our
Class A Common Stock. Shares repurchased under this authorization totaled 1,022,393 for the
quarter ended April 2, 2010. As of April 2, 2010, 301,866 shares remained available for repurchase
under this authorization.
On December 3, 2009, our Board of Directors approved the repurchase of up to an additional
6,000,000 shares of our Class A Common Stock, all of which remained available for repurchase as of
April 2, 2010.
From time to time, we use plans adopted under Rule 10b5-1 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended, to facilitate share
repurchases.
During the first quarter of 2010, 200,000 shares of Class B Common Stock were converted to an
equivalent amount of Class A Common Stock.
Note 12. Litigation
We are involved in various litigation and legal proceedings that have arisen in the ordinary course
of business. Management believes that the ultimate resolution of any such matters will not have a
material
adverse effect on our consolidated financial statements.
13. Subsequent Event
On
April 27, 2010, the Company received $1,500 to terminate, as of December 2010, a worldwide
licensing arrangement associated with its luggage, travel bags and backpacks. The gain realized
from the termination of the licensing arrangement will be recorded in the Companys second quarter
2010 results of operations.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is managements discussion and analysis of the financial condition and results of
operations of The Timberland Company and its subsidiaries (we, our, us, its, Timberland
or the Company), as well as our liquidity and capital resources. The discussion, including known
trends and uncertainties identified by management, should be read in conjunction with the Companys
unaudited condensed consolidated financial statements and related notes included in this Quarterly
Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2009.
Included herein are discussions and reconciliations of Total Company, Europe and Asia revenue
changes to constant dollar revenue changes. Constant dollar revenue changes, which exclude the
impact of changes in foreign exchange rates, are not Generally Accepted Accounting Principle
(GAAP) performance measures. The difference between changes in reported revenue (the most
comparable GAAP measure) and constant dollar revenue changes is the impact of foreign currency
exchange rate fluctuations. We provide constant dollar revenue changes for Total Company, Europe
and Asia results because we use the measure to understand the underlying growth rate of revenue
excluding the impact of items that are not under managements direct control, such as changes in
foreign exchange rates. The limitation of this measure is that it excludes items that have an
impact on the Companys revenue. This limitation is best addressed by using constant dollar
revenue changes in combination with the GAAP numbers.
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
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financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to sales
returns and allowances, realization of outstanding accounts receivable, the carrying value of
inventories, derivatives, other contingencies, impairment of assets, incentive compensation
accruals, share-based compensation and the provision for income taxes. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Historically, actual
results have not been materially different from our estimates. Because of the uncertainty inherent
in these matters, actual results could differ from the estimates used in, or that result from,
applying our critical accounting policies. Our significant accounting policies are described in
Note 1 to the Companys consolidated financial statements included in Part II, Item 8 of our Annual
Report on Form 10-K for the year ended December 31, 2009. Our estimates, assumptions and judgments
involved in applying the critical accounting policies are described in Part II, Item 7:
Managements Discussion and Analysis of Financial Condition and Results of Operations, of our
Annual Report on Form 10-K for the year ended December 31, 2009.
Overview
Our principal strategic goal is to become the authentic outdoor brand of choice globally by
offering an integrated product selection that equips consumers to enjoy the experience of being in
the outdoors. We sell our products to consumers who embrace an outdoor-inspired lifestyle through
high-quality distribution channels, including our own retail stores, which reinforce the premium
positioning of the Timberlandâ brand.
Our ongoing efforts to achieve this goal include (i) enhancing our leadership position in our core
Timberland® footwear business through an increased focus on technological innovation and
big idea initiatives like Earthkeepers, (ii) expanding our global apparel and accessories
business by leveraging the brands equity and initiatives through a combination of in-house
development and licensing arrangements with trusted partners, (iii) expanding our brands
geographically, (iv) driving operational and financial excellence, (v) setting the standard for
social and environmental responsibility and (vi) striving to be an employer of choice.
A summary of our first quarter of 2010 financial performance, compared to the first quarter of
2009, follows:
| First quarter revenue increased 6.9%, or 3.2% on a constant dollar basis. | ||
| Gross margin increased 370 basis points to 49.8%. | ||
| Operating income increased $21.2 million to $39.4 million. | ||
| Net income increased from $15.9 million to $25.7 million. | ||
| Diluted earnings per share increased to $0.47 from $0.27. | ||
| Cash at the end of the quarter was $238.5 million with no debt outstanding. |
Results of Operations for the Quarter Ended April 2, 2010 as Compared to the Quarter Ended
April 3, 2009
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Revenue
In the first quarter of 2010, our consolidated revenues grew 6.9% to $317.0 million, reflecting growth across North America, Europe and Asia and favorable foreign exchange rate impacts. Nearly every market in Europe and Asia delivered top-line growth for the first quarter of 2010 compared to the prior year period. Double-digit growth in the UK and Italy, our largest markets in Europe, and strong growth in Spain and Scandinavia were partially offset by declines in our European distributor business. Revenue in China more than doubled in the first quarter and Taiwan posted double-digit growth for the quarter, leading the favorable year over year comparison in Asia. On a constant dollar basis, consolidated revenues increased 3.2%.
In the first quarter of 2010, our consolidated revenues grew 6.9% to $317.0 million, reflecting growth across North America, Europe and Asia and favorable foreign exchange rate impacts. Nearly every market in Europe and Asia delivered top-line growth for the first quarter of 2010 compared to the prior year period. Double-digit growth in the UK and Italy, our largest markets in Europe, and strong growth in Spain and Scandinavia were partially offset by declines in our European distributor business. Revenue in China more than doubled in the first quarter and Taiwan posted double-digit growth for the quarter, leading the favorable year over year comparison in Asia. On a constant dollar basis, consolidated revenues increased 3.2%.
Products
By product group, our footwear revenues increased 6.6% to $225.5 million compared to the prior year and apparel and accessories revenues grew 8.9% to $85.7 million. Growth in footwear revenues was driven primarily by improved wholesale revenue in Asia and Europe, benefits from foreign exchange and higher comparable store sales globally. Footwear revenue in North America was relatively flat compared to the prior year quarter, although we did see high single-digit growth in our Timberland PRO® line. The improvement in apparel and accessories revenues compared to the prior year reflects revenue growth in North America and Asia related to sales of apparel in our own stores and through our wholesale partners, partially offset by declines in our European wholesale apparel business. Royalty and other revenue decreased 8.7% to $5.8 million compared to the prior year period primarily due to a decline in licensed kids apparel in Europe.
By product group, our footwear revenues increased 6.6% to $225.5 million compared to the prior year and apparel and accessories revenues grew 8.9% to $85.7 million. Growth in footwear revenues was driven primarily by improved wholesale revenue in Asia and Europe, benefits from foreign exchange and higher comparable store sales globally. Footwear revenue in North America was relatively flat compared to the prior year quarter, although we did see high single-digit growth in our Timberland PRO® line. The improvement in apparel and accessories revenues compared to the prior year reflects revenue growth in North America and Asia related to sales of apparel in our own stores and through our wholesale partners, partially offset by declines in our European wholesale apparel business. Royalty and other revenue decreased 8.7% to $5.8 million compared to the prior year period primarily due to a decline in licensed kids apparel in Europe.
Channels
Wholesale revenue was $231.9 million in the first quarter of 2010, a 6.1% increase compared to the
prior year quarter driven primarily by favorable foreign exchange rate impacts. During the
quarter, we saw double-digit growth in Asia, a positive trend in Europe and flat performance in
North America.
Retail revenues grew 9.1% to $85.1 million in the first quarter of 2010, driven by favorable
foreign exchange rate impacts and solid comparable store sales growth. Comparable store sales were
up 4.5% compared to the first quarter of 2009 in our specialty and outlet stores across North
America, Europe and Asia. We had 220 Company-owned stores, shops and outlets worldwide at the end
of the first quarter of 2010 compared to 216 at the end of the first quarter of 2009.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 49.8% for the first quarter of 2010, a
370 basis point improvement compared to the first quarter of 2009. Gross margin improvement for
the quarter was driven by product mix, better pricing in part due to less promotional activity in
retail, favorable channel mix, and lower product costs. While the Company expects the benefits
from product mix to continue, it believes that increased product costs as a result of higher
leather, transportation and labor costs could adversely impact gross margin in the second half of
2010.
We include the costs of procuring inventory (inbound freight and duty, overhead and other similar
costs) in cost of goods sold. These costs amounted to $10.9 million and $13.9 million for the
first quarters of 2010 and 2009, respectively. The decrease is principally the result of freight
cost favorability quarter over quarter.
Operating Expense
Operating expense for the first quarter of 2010 was $118.6 million, flat when compared to the first
quarter of 2009. Foreign exchange rate impacts increased selling and general and administrative
expenses by approximately $3.7 million in the first quarter of 2010. This impact was partially
offset as 2010 included a $1.5 million gain related to the termination of a licensing agreement and
2009 included a charge of $0.9 million to reflect the impairment of a trademark.
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Selling expense was $92.7 million in the first quarter of 2010, an increase of less than 1% over
the same period in 2009. Selling expense reflects decreased advertising spend and fixed asset
write-offs compared to the prior year period offset by unfavorable foreign exchange rate movements
and higher incentive compensation costs.
We include the costs of physically managing inventory (warehousing and handling costs) in selling
expense. These costs totaled $8.4 million and $9.0 million in the first quarters of 2010 and 2009,
respectively.
In the first quarters of 2010 and 2009, we recorded $0.7 million and $0.6 million, respectively, of
reimbursed shipping expenses within revenues and the related shipping costs within selling expense.
Shipping costs are included in selling expense and were $5.2 million and $4.9 million for the
quarters ended April 2, 2010 and April 3, 2009, respectively.
Advertising expense, which is included in selling expense, was $3.9 million and $4.6 million in
the first quarters of 2010 and 2009, respectively. A decrease in production costs associated with
our Spring 2009 media campaigns was partially offset by continued investment in Internet and other
digital media initiatives. Advertising expense includes co-op advertising costs, consumer-facing
advertising costs such as print, television and Internet campaigns, production costs including
agency fees, and catalog costs. Advertising costs are expensed at the time the advertising is
used, predominantly in the season that the advertising costs are incurred. Prepaid advertising
recorded on our unaudited condensed consolidated balance sheets as of April 2, 2010 and April 3,
2009 was $1.3 million and $2.3 million, respectively.
General and administrative expense for the first quarter of 2010 was $25.9 million, an increase of
1.9% compared to the $25.4 million reported in the first quarter of 2009, driven by increases in
incentive compensation costs of $2.6 million, partially offset by a gain of $1.5 million associated
with the termination of a licensing agreement and reductions in marketing and discretionary
spending.
Total operating expense in the first quarter of 2009 included a charge of $0.9 million for the
impairment of a trademark, and restructuring credits of $0.1 million.
Operating Income/(Loss)
We recorded operating income of $39.4 million in the first quarter of 2010, compared to operating
income of $18.2 million in the prior year period. Operating income included an intangible asset
impairment charge of $0.9 million and restructuring credits of $0.1 million in the first quarter of
2009.
Other Income/(Expense) and Taxes
Interest income was $0.1 million and $0.4 million in the first quarters of 2010 and 2009,
respectively, reflecting lower interest rates. Interest expense, which is comprised of fees
related to the establishment and maintenance of our revolving credit facility and interest paid on
short-term borrowings, was $0.1 million in each of the first quarters of 2010 and 2009.
Other, net, included foreign exchange losses of $0.4 million and $0.3 million in the first quarters
of 2010 and 2009, respectively, resulting from changes in the fair value of financial derivatives,
specifically forward contracts not designated as cash flow hedges, and the currency gains and
losses incurred on the settlement of local currency denominated receivables and payables. These
results were driven by the volatility of exchange rates within the first quarters of 2010 and 2009
and should not be considered indicative of expected future results.
The effective income tax rate for the first quarter of 2010 was 34.3%. The Company anticipates
that its effective tax rate for 2010 will be lower than its overall statutory rate of 39%. The
effective income tax rate for the first quarter of 2009 was 11%. The rate in 2009 was impacted by
the release of approximately $6.4 million in specific tax reserves due to the closure of certain
audits in the first quarter of 2009 and the geographic mix of our profits.
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In December 2009, we received a Notice of Assessment from the Internal Revenue Department of Hong
Kong for approximately $17.6 million with respect to the tax years 2004 through 2008. In
connection with the assessment, the Company is required to make payments to the Internal Revenue
Department of Hong
Kong totaling approximately $7.5 million in the second quarter of 2010. We believe we have a sound
defense to the proposed adjustment and will continue to firmly oppose the assessment. We believe
that the assessment does not impact the level of liabilities for our income tax contingencies.
However, actual resolution may differ from our current estimates, and such differences could have a
material impact on our future effective tax rate and our results of operations.
Segments Review
We have three reportable business segments (see Note 7 to the unaudited condensed consolidated
financial statements contained herein): North America, Europe and Asia. Beginning in the first
quarter of 2010, certain U.S. distribution expenses and short-term incentive compensation costs
previously reported in Unallocated Corporate were reclassified to North America, Europe and Asia to
conform to the current period presentation. Additionally, certain distributor revenue and
operating income reflected in our Europe segment in prior periods has been reclassified to Asia to
conform to the current period presentation.
Revenue by segment for the quarter ended April 2, 2010 compared to the quarter ended April 3, 2009
is as follows (dollars in millions):
For the Quarter Ended | |||||||||||||
April 2, | April 3, | ||||||||||||
2010 | 2009 | % Change | |||||||||||
North America |
$ | 121.9 | $ | 119.8 | 1.7 | % | |||||||
Europe |
151.6 | 139.5 | 8.7 | ||||||||||
Asia |
43.5 | 37.3 | 16.9 | ||||||||||
$ | 317.0 | $ | 296.6 | 6.9 | |||||||||
Operating income/(loss) by segment and as a percentage of revenue for the quarters ended April 2,
2010 and April 3, 2009 are included in the table below (dollars in millions). Segment operating
income is presented as a percentage of its respective segment revenue. Unallocated Corporate
expenses are presented as a percentage of total revenue.
For the Quarter Ended | ||||||||||||||||
April 2, | April 3, | |||||||||||||||
2010 | 2009 | |||||||||||||||
North America |
$ | 21.6 | 17.8 | % | $ | 9.6 | 8.0 | % | ||||||||
Europe |
37.3 | 24.6 | 29.9 | 21.4 | ||||||||||||
Asia |
6.9 | 15.7 | 1.9 | 5.1 | ||||||||||||
Unallocated Corporate |
(26.4 | ) | (8.3 | ) | (23.2 | ) | (7.8 | ) | ||||||||
$ | 39.4 | 12.4 | $ | 18.2 | 6.1 | |||||||||||
North America
North America revenues were $121.9 million in the first quarter of 2010, an increase of 1.7% as
compared to the same period in 2009. Growth in apparel and accessories and high-single digit
growth in our Timberland PRO® footwear line was partially offset by declines in other
footwear. Within North America, our retail business had revenue growth of 4.6%, driven by a 2.7%
increase in comparable store sales. We had 67 stores at April 2, 2010 compared to 68 stores at
April 3, 2009.
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Operating income for our North America segment was $21.6 million, compared to $9.6 million for the
first quarter of 2009. The increase was driven by a 790 basis point improvement in gross margin,
due primarily to favorable product mix, reduced product costs, less promotional activity in retail,
and lower provisions for inventory and sales returns and allowances, combined with a 4.8% decrease
in operating expenses.
Operating expenses in 2010 reflect a gain of $1.5 million associated with the termination of a
licensing agreement and a reduction of $0.7 million associated with fixed asset write-offs related
to our e-commerce business and underperforming retail stores in 2009. These improvements were
partially offset by increases in Internet marketing and other digital media initiatives.
Europe
Europe recorded revenues of $151.6 million in the first quarter of 2010, which was an 8.7% increase
from the first quarter of 2009, and an increase of 2.6% on a constant dollar basis. Growth across
our major markets in Europe, in particular the UK, was partially offset by weakness in certain
distributor markets, such as Greece, Turkey and the Middle East. Both wholesale and retail
channels showed strong growth in footwear. Strength in retail apparel sales was offset by apparel
revenue declines in the wholesale channel. Retail growth of 18.8% was driven by comparable store
sales growth of 6.0% and favorable foreign exchange rate impacts. We had 63 stores at both April
2, 2010 and April 3, 2009.
Timberlands European segment recorded operating income of $37.3 million in the first quarter of
2010, compared to operating income of $29.9 million in the first quarter of 2009. Growth in Europe
was driven by a 170 basis point increase in gross margin from favorable product and channel mix, as
well as lower product costs. The increase in margin was partially offset by a 3.5% increase in
operating expenses, due principally to the impact of changes in foreign exchange rates. Operating
expense for 2009 included a $0.9 million charge for the impairment of a trademark.
Asia
In Asia, revenues increased 16.9%, or 12.6% in constant dollars, to $43.5 million in the first
quarter of 2010 due to strong wholesale growth in China and Taiwan, driven by sales of mens
footwear and apparel. Retail revenues were up slightly, driven by favorable foreign exchange rate
impacts. Comparable store sales grew 4.9%. We had 90 stores at April 2, 2010 compared to 85
stores at April 3, 2009.
We had operating income in our Asia segment of $6.9 million for the first quarter of 2010, compared
to operating income of $1.9 million for the first quarter of 2009, driven by a 130 basis point
improvement in gross margin, reflecting favorable foreign exchange rate impacts and lower levels of
sales returns and allowances. In addition, operating expenses decreased 6.6% due to lower
employee-related costs.
Corporate Unallocated
Our Unallocated Corporate expenses, which include central support and administrative costs not
allocated to our business segments, increased 13.9% to $26.4 million, which reflects higher
incentive compensation costs.
Reconciliation of Total Company, Europe and Asia Revenue Increases/(Decreases) To Constant
Dollar Revenue Increases/(Decreases)
Total Company Revenue Reconciliation:
For the Quarter | ||||||||
Ended April 2, 2010 | ||||||||
$ Change | ||||||||
(millions) | % Change | |||||||
Revenue increase (GAAP) |
$ | 20.4 | 6.9 | % | ||||
Increase due to foreign exchange rate changes |
10.8 | 3.7 | % | |||||
Revenue increase in constant dollars |
$9.6 | 3.2 | % |
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Europe Revenue Reconciliation:
For the Quarter | ||||||||
Ended April 2, 2010 | ||||||||
$ Change | ||||||||
(millions) | % Change | |||||||
Revenue increase (GAAP) |
$ | 12.1 | 8.7 | % | ||||
Increase due to foreign exchange rate changes |
8.4 | 6.1 | % | |||||
Revenue increase in constant dollars |
$ | 3.7 | 2.6 | % | ||||
Asia Revenue Reconciliation:
For the Quarter | ||||||||
Ended April 2, 2010 | ||||||||
$ Change | ||||||||
(millions) | % Change | |||||||
Revenue increase (GAAP) |
$ | 6.3 | 16.9 | % | ||||
Increase due to foreign exchange rate changes |
1.6 | 4.3 | % | |||||
Revenue increase in constant dollars |
$ | 4.7 | 12.6 | % |
The difference between changes in reported revenue (the most comparable GAAP measure) and constant
dollar revenue changes is the impact of foreign currency. We calculate constant dollar revenue
changes by recalculating current year revenue using the prior years exchange rates and comparing
it to the prior year revenue reported on a GAAP basis. We provide constant dollar revenue changes
for Total Company, Europe and Asia results because we use the measure to understand the underlying
growth rate of revenue excluding the impact of items that are not under managements direct
control, such as changes in foreign exchange rates.
Accounts Receivable and Inventory
Accounts receivable were $157.6 million as of April 2, 2010, compared with $149.2 million at
December 31, 2009 and $172.3 million at April 3, 2009. Days sales outstanding were 45 days as of
April 2, 2010, compared with 35 days as of December 31, 2009 and 52 days as of April 3, 2009.
Wholesale days sales outstanding were 51 days as of April 2, 2010, compared with 45 days as of
December 31, 2009 and 58 days as of April 3, 2009. We continued to improve our collection
performance despite the difficult economic environment.
Inventory was $136.9 million as of April 2, 2010, compared with $158.5 million as of December 31,
2009 and $162.8 million as of April 3, 2009, reflecting continued disciplined inventory management.
Excess and obsolete inventory represents a smaller percentage of our overall inventory than it has
historically.
Liquidity and Capital Resources
Net cash used by operations for the first quarter of 2010 was $26.3 million, compared with $44.3
million for the first quarter of 2009. The improvement in cash usage was due primarily to higher
net income and the timing of tax payments.
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Net cash used for investing activities was $2.8 million in the first quarter of 2010, compared with
$4.4 million in the first quarter of 2009. Cash used for the acquisition of Glaudio, net of cash
acquired, was $1.5 million in the first quarter of 2009. Capital spending totaled $2.8 million in
the first quarters of 2010 and 2009.
Net cash used by financing activities was $18.9 million in the first quarter of 2010, compared with
$8.5 million in the first quarter of 2009. Cash flows for financing activities reflected share
repurchases of $19.5 million in the first quarter of 2010, compared with $9.1 million in the first
quarter of 2009.
We are exposed to the credit risk of those parties with which we do business including
counterparties on our derivative contracts and our customers. Derivative instruments expose us to
credit and market risk. The market risk associated with these instruments resulting from currency
exchange movements is expected to offset the market risk of the underlying transactions being
hedged. We do not believe there is a significant risk of loss in the event of non-performance by
the counterparties associated with these instruments because these transactions are executed with a
group of major financial institutions and have varying maturities through January 2011. As a
matter of policy, we enter into these contracts only with counterparties having a minimum
investment-grade or better credit rating. Credit risk is managed through the continuous monitoring
of exposures to such counterparties.
Additionally, consumer spending continues to be affected by the current macro-economic environment,
particularly the disruption of the credit and stock markets and high unemployment. Continued
deterioration, or lack of improvement, in the markets and economic conditions generally could
adversely impact our customers and their ability to access credit.
We may utilize our committed and uncommitted lines of credit to fund our seasonal working capital
needs. We have not experienced any restrictions on the availability of these lines and the adverse
capital and credit market conditions are not expected to significantly affect our ability to meet
our liquidity needs.
We have an unsecured committed revolving credit agreement with a group of banks, which matures on
June 2, 2011 (Agreement). The Agreement provides for $200 million of committed borrowings, of
which up to $125 million may be used for letters of credit. Any letters of credit outstanding
under the Agreement ($1.8 million at April 2, 2010) reduce the amount available for borrowing under
the Agreement. Upon approval of the bank group, we may increase the committed borrowing limit by
$100 million for a total commitment of $300 million. Under the terms of the Agreement, we may
borrow at interest rates based on Eurodollar rates (approximately 0.3% at April 2, 2010), plus an
applicable margin based on a fixed-charge coverage grid of between 13.5 and 47.5 basis points that
is adjusted quarterly. As of April 2, 2010, the applicable margin under the facility was 47.5
basis points. We pay a utilization fee of an additional 5 basis points if our outstanding
borrowings under the facility exceed $100 million. We also pay a commitment fee of 6.5 to 15 basis
points per annum on the total commitment, based on a fixed-charge coverage grid that is adjusted
quarterly. As of April 2, 2010, the commitment fee was 15 basis points. The Agreement places
certain limitations on additional debt, stock repurchases, acquisitions, and the amount of
dividends we may pay, and includes certain other financial and non-financial covenants. The
primary financial covenants relate to maintaining a minimum fixed-charge coverage ratio of 2.25:1
and a maximum leverage ratio of 2:1. We measure compliance with the financial and non-financial
covenants and ratios as required by the terms of the Agreement on a fiscal quarter basis.
We have uncommitted lines of credit available from certain banks which totaled $30 million at April
2, 2010. Any borrowings under these lines would be at prevailing money market rates. Further, we
have an uncommitted letter of credit facility of $80 million to support inventory purchases. These
arrangements may be terminated at any time at the option of the banks or at our option.
As of April 2, 2010 and April 3, 2009, we had no borrowings outstanding under any of our credit
facilities.
Management believes that our operating costs, capital requirements and funding for our share
repurchase program for the balance of 2010 will be funded through our current cash balances, our
existing credit
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facilities (which place certain limitations on additional debt, stock repurchases,
acquisitions and on the amount of dividends we may pay, and also contain certain other financial
and operating covenants) and cash from operations, without the need for additional financing.
However, as discussed in the sections entitled Cautionary Statements for Purposes of the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and Forward Looking
Information on page 2 of this Quarterly Report on Form 10-Q and in Part II, Item 1A, Risk Factors,
of this Quarterly Report on Form 10-Q, several risks and
uncertainties could require that the Company raise additional capital through equity and/or debt
financing. From time to time, the Company considers acquisition opportunities which, if pursued,
could also result in the need for additional financing. However, if the need arises, our ability
to obtain any additional financing will depend upon prevailing market conditions, our financial
condition and the terms and conditions of such financing. The continued volatility in the credit
markets could result in significant increases in borrowing costs for any new debt we may require.
Off-Balance Sheet Arrangements
Letters of Credit
Letters of Credit
As of both April 2, 2010 and April 3, 2009, we had letters of credit outstanding of $15.7 million.
These letters of credit were issued principally in support of real estate commitments in 2010.
We use funds from operations and unsecured committed and uncommitted lines of credit as the primary
sources of financing for our seasonal and other working capital requirements. Our principal risks
related to these sources of financing are the impact on our financial condition from economic
downturns, a decrease in the demand for our products, increases in the prices of materials and a
variety of other factors.
New Accounting Pronouncements
A discussion of new accounting pronouncements, none of which had a material impact on our
operations, financial condition or liquidity, is included in Note 1 to the unaudited condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our financial position and results of operations are routinely
subject to a variety of risks, including market risk associated with interest rate movements on
borrowings and investments and currency rate movements on non-U.S. dollar denominated assets,
liabilities and cash flows. We regularly assess these risks and have established policies and
business practices that should mitigate a portion of the adverse effect of these and other
potential exposures.
We utilize cash from operations and U.S. dollar denominated borrowings to fund our working capital
and investment needs. Short-term debt, if required, is used to meet working capital requirements
and long-term debt, if required, is generally used to finance long-term investments. In addition,
we use derivative instruments to manage the impact of foreign currency fluctuations on a portion of
our foreign currency transactions. These derivative instruments are viewed as risk management
tools and are not used for trading or speculative purposes. Cash balances are invested in
high-grade securities with terms of less than three months.
We have available unsecured committed and uncommitted lines of credit as sources of financing for
our working capital requirements. Borrowings under these credit agreements bear interest at
variable rates based on either lenders cost of funds, plus an applicable spread, or prevailing
money market rates. As of April 2, 2010 and April 3, 2009, we had no short-term or long-term debt
outstanding.
Our foreign currency exposure is generated primarily from our European operating subsidiaries and,
to a lesser degree, our Asian and Canadian operating subsidiaries. We seek to mitigate the impact
of these foreign currency fluctuations through a risk management program that includes the use of
derivative financial instruments, primarily foreign currency forward contracts. These derivative
instruments are
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carried at fair value on our balance sheet. The Company has implemented a program
that qualifies for hedge accounting treatment to aid in mitigating our foreign currency exposures
and decreasing the volatility of our earnings. The foreign currency forward contracts under this
program will expire in 10 months or less. Based upon a sensitivity analysis as of April
2, 2010, a 10% change in foreign exchange rates would cause the fair value of our derivative
instruments to increase/decrease by approximately $11.5 million, compared to an increase/decrease
of $12.2 million at December 31, 2009 and an increase/decrease of $12.6 million at April 3, 2009.
Item 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures which are designed to ensure that
information required to be disclosed by us in reports we file or submit under the Securities
Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commissions rules and forms. These
disclosure controls and procedures include controls and procedures designed to ensure that
information required to be disclosed under the federal securities laws is accumulated and
communicated to our management on a timely basis to allow decisions regarding required disclosure.
Based on their evaluation, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, were effective as of the end of the period covered by this report.
There were no changes in our internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended April 2,
2010 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Part
II - OTHER INFORMATION
Item 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you
should carefully consider the factors discussed in the section entitled Cautionary Statements for
Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
on page 2 of our Annual Report on Form 10-K for the year ended December 31, 2009 (our Annual
Report on Form 10-K), in the section entitled Risk Factors in Part I, Item 1A of our Annual
Report on Form 10-K, and in the section entitled Risk Factors in Part II, Item 1A of any
Quarterly Report on Form 10-Q filed subsequent to our Annual Report on Form 10-K, which could
materially affect our business, financial condition or future results. The risks described in this
Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K, and in any Quarterly Report on
Form 10-Q filed subsequent to our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial condition or future
results.
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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES(1)
For
the Three Fiscal Months Ended April 2,
2010 |
||||||||||||||||
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 | ||||||||||||
January 1 January 29 |
- | $ | - | - | 7,324,259 | |||||||||||
January 30 February 26 |
409,865 | 17.99 | 409,865 | 6,914,394 | ||||||||||||
February 27 April 2 |
612,528 | 20.64 | 612,528 | 6,301,866 | ||||||||||||
Q1 Total |
1,022,393 | $ | 19.58 | 1,022,393 |
Footnote (1)
Approved | ||||||||||||
Announcement | Program | Expiration | ||||||||||
Date | Size (Shares) | Date | ||||||||||
Program 1 |
03/10/2008 | 6,000,000 | None | |||||||||
Program 2 |
12/09/2009 | 6,000,000 | None |
No existing programs expired or were terminated during the reporting period.
* Fiscal month
** Based on trade date - not settlement date
** Based on trade date - not settlement date
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Item 6. EXHIBITS
Exhibits.
Exhibit 10.1 The Timberland Company 2010 Executive Long Term Incentive Program, filed
herewith.
Exhibit 31.1 Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 31.2 Principal Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 32.1 Chief Executive Officer Certification Pursuant to Section 1350, Chapter 63
of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished herewith.
Exhibit 32.2 Chief Financial Officer Certification Pursuant to Section 1350, Chapter 63
of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished herewith.
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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/ JEFFREY B. SWARTZ | |||
Date: May 6, 2010
|
Jeffrey B. Swartz | |||
Chief Executive Officer | ||||
By: | /s/ CARRIE W. TEFFNER | |||
Date: May 6, 2010
|
Carrie W. Teffner | |||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit | Description | |
Exhibit 10.1 | The Timberland Company 2010 Executive Long Term Incentive
Program, filed herewith. |
|
Exhibit 31.1 | Principal Executive Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
Exhibit 31.2 | Principal Financial Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
Exhibit 32.1 | Chief Executive Officer Certification Pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished herewith. |
|
Exhibit 32.2 | Chief Financial Officer Certification Pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished herewith. |