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

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

Commission File Number 1-9548

The Timberland Company

 

(Exact name of registrant as specified in its charter)

Delaware		02-0312554
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 Domain Drive, Stratham, New Hampshire		03885
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes       o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes       o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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       x No

On April 29, 2011, 41,200,824 shares of the registrant’s Class A Common Stock were outstanding and 10,568,389 shares of the registrant’s Class B Common Stock were outstanding.

THE TIMBERLAND COMPANY

FORM 10-Q

TABLE OF CONTENTS

		Page(s)
Part I — Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets - April 1, 2011, December 31, 2010 and April 2, 2010			3
Unaudited Condensed Consolidated Statements of Operations - For the Quarters Ended April 1, 2011 and April 2, 2010			4
Unaudited Condensed Consolidated Statements of Cash Flows - For the Quarters Ended April 1, 2011 and April 2, 2010			5
Notes to Unaudited Condensed Consolidated Financial Statements			6-18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27
Part II — Other Information
Item 1A. Risk Factors			27
Item 6. Exhibits			28
Signatures			29
Exhibit Index			30
Exhibits			31-39
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Form 10-Q
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. Statements containing the words “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue,” “target,” or words or phrases of similar meaning, and other statements contained in this Quarterly Report regarding matters that are not historical facts are forward-looking statements. Prospective information is based on management’s 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, 2010 (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 Company’s 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 Company’s 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 Company’s 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.

Form 10-Q
Page 3

Part I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE TIMBERLAND COMPANY

(Dollars in Thousands)

		April 1,				December 31,				April 2,
		2011				2010				2010
Assets
Current assets
Cash and equivalents		$	265,271			$	272,221			$	238,540
Accounts receivable, net of allowance for doubtful accounts of $11,591 at April 1, 2011, $10,859 at December 31, 2010 and $12,299 at April 2, 2010			178,492				188,336				157,615
Inventory			186,862				180,068				136,941
Prepaid expense			33,002				32,729				29,374
Prepaid income taxes			27,898				25,083				14,389
Deferred income taxes			21,195				22,562				24,448
Derivative assets			5				29				5,444
Total current assets			712,725				721,028				606,751
Property, plant and equipment, net			70,705				68,043				66,245
Deferred income taxes			10,395				15,594				15,379
Goodwill			38,958				38,958				44,353
Intangible assets, net			34,590				34,839				44,648
Other assets, net			17,048				13,897				13,652
Total assets		$	884,421			$	892,359			$	791,028
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	67,493			$	91,025			$	44,265
Accrued expense
Payroll and related			23,385				47,376				21,509
Other			67,940				80,675				66,913
Income taxes payable			15,757				25,760				20,279
Deferred income taxes			-				-				261
Derivative liabilities			4,416				1,690				60
Total current liabilities			178,991				246,526				153,287
Other long-term liabilities			34,699				34,322				37,796
Commitments and contingencies (See Note 12)
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; 76,806,880 shares issued at April 1, 2011, 75,543,672 shares issued at December 31, 2010 and 74,872,066 shares issued at April 2, 2010			768				756				749
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; 10,568,389 shares issued and outstanding at April 1, 2011, 10,568,389 shares issued and outstanding at December 31, 2010 and 10,889,160 shares issued and outstanding at April 2, 2010			106				106				109
Additional paid-in capital			319,394				280,154				268,982
Retained earnings			1,089,276				1,071,305				1,000,430
Accumulated other comprehensive income			9,450				6,671				11,572
Treasury Stock at cost; 35,630,635 Class A shares at April 1, 2011, 35,610,050 Class A shares at December 31, 2010 and 32,177,071 Class A shares at April 2, 2010			(748,263	)			(747,481	)			(681,897	)
Total stockholders’ equity			670,731				611,511				599,945
Total liabilities and stockholders’ equity		$	884,421			$	892,359			$	791,028

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

Form 10-Q
Page 4

THE TIMBERLAND COMPANY

(Amounts in Thousands, Except Per Share Data)

		For the Quarter Ended
		April 1, 2011				April 2, 2010
Revenue		$	349,004			$	317,042
Cost of goods sold			185,690				159,059
Gross profit			163,314				157,983
Operating expense
Selling			103,076				92,696
General and administrative			32,353				25,899
Total operating expense			135,429				118,595
Operating income			27,885				39,388
Other income/(expense), net
Interest income			131				74
Interest expense			(188	)			(140	)
Other, net			1,681				(133	)
Total other income/(expense), net			1,624				(199	)
Income before provision for income taxes			29,509				39,189
Provision for income taxes			11,538				13,442
Net income		$	17,971			$	25,747
Earnings per share
Basic		$	.35			$	.48
Diluted		$	.35			$	.47
Weighted-average shares outstanding
Basic			50,912				54,166
Diluted			52,004				54,643

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

Form 10-Q
Page 5

THE TIMBERLAND COMPANY

(Dollars in Thousands)

		For the Quarter Ended
		April 1, 2011				April 2, 2010
Cash flows from operating activities:
Net income		$	17,971			$	25,747
Adjustments to reconcile net income to net cash used by operating activities:
Deferred income taxes			7,510				1,352
Share-based compensation			3,611				1,558
Depreciation and amortization			6,129				6,545
Provision for losses on accounts receivable			648				1,468
Excess tax benefit from share-based compensation			(4,198	)			(55	)
Unrealized (gain)/loss on derivatives			382				(163	)
Other non-cash charges/(credits), net			53				(258	)
Increase/(decrease) in cash from changes in operating assets and liabilities:
Accounts receivable			11,638				(13,003	)
Inventory			(7,165	)			20,618
Prepaid expense and other assets			(1,808	)			3,723
Accounts payable			(23,416	)			(37,065	)
Accrued expense			(37,054	)			(34,145	)
Prepaid income taxes			(2,815	)			(2,596	)
Income taxes payable			(6,661	)			(325	)
Other liabilities			837				284
Net cash used by operating activities			(34,338	)			(26,315	)
Cash flows from investing activities:
Additions to property, plant and equipment			(8,653	)			(2,818	)
Other			662				23
Net cash used by investing activities			(7,991	)			(2,795	)
Cash flows from financing activities:
Common stock repurchases			(915	)			(19,512	)
Issuance of common stock			31,399				719
Excess tax benefit from share-based compensation			4,198				303
Other			(785	)			(451	)
Net cash provided/(used) by financing activities			33,897				(18,941	)
Effect of exchange rate changes on cash and equivalents			1,482				(3,248	)
Net decrease in cash and equivalents			(6,950	)			(51,299	)
Cash and equivalents at beginning of period			272,221				289,839
Cash and equivalents at end of period		$	265,271			$	238,540
Supplemental disclosures of cash flow information:
Interest paid		$	221			$	173
Income taxes paid		$	13,779			$	14,484
Non-cash investing activity (ERP system costs on account)		$	1,700			$	-

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

Form 10-Q
Page 6

THE TIMBERLAND COMPANY

(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, 2010.

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 Company’s 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 Company’s 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 2011 and 2010 ended on April 1, 2011 and April 2, 2010, respectively.

New Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units With Zero or Negative Carrying Amounts. This accounting standard update requires entities with a zero or negative carrying value to assess, considering adverse qualitative factors, whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. ASU No. 2010-28 is effective for impairment tests performed by the Company during 2011, and its adoption is not expected to have a material impact on the Company’s results of operations or financial position.

Note 2. Fair Value Measurements

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that ranks the quality and reliability of the information used to determine fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The Company recognizes and reports significant transfers between Level 1 and Level 2, and into and out of Level 3, as of the actual date of the event or change in circumstances that caused the transfer.

Form 10-Q
Page 7

The following tables present information about our assets and liabilities measured at fair value on a recurring basis as of April 1, 2011, December 31, 2010, and April 2, 2010:

Description

		Level 1				Level 2				Level 3				Impact of Netting				April 1, 2011
Assets:
Cash equivalents:
Time deposits		$	-			$	90,000			$	-			$	-			$	90,000
Mutual funds		$	-			$	45,110			$	-			$	-			$	45,110
Foreign exchange forward contracts:
Derivative assets		$	-			$	709			$	-			$	(580)			$	129
Cash surrender value of life insurance		$	-			$	8,370			$	-			$	-			$	8,370
Liabilities:
Foreign exchange forward contracts:
Derivative liabilities		$	-			$	5,006			$	-			$	(580)			$	4,426
Description
		Level 1				Level 2				Level 3				Impact of Netting				December 31, 2010
Assets:
Cash equivalents
Time deposits		$	-			$	95,000			$	-			$	-			$	95,000
Mutual funds		$	-			$	13,202			$	-			$	-			$	13,202
Foreign exchange forward contracts:
Derivative assets		$	-			$	1,801			$	-			$	(1,771)			$	30
Cash surrender value of life insurance		$	-			$	7,564			$	-			$	-			$	7,564
Liabilities:
Foreign exchange forward contracts:
Derivative liabilities		$	-			$	3,572			$	-			$	(1,771)			$	1,801
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

Cash equivalents, included in cash and equivalents on our unaudited condensed consolidated balance sheets, 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.

Form 10-Q
Page 8

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 April 1, 2011, the derivative contracts above include $124 of assets and $11 of liabilities included in other assets, net and other long-term liabilities, respectively, on our unaudited condensed consolidated balance sheet. As of December 31, 2010, the derivative contracts above include $1 of assets and $111 of liabilities included in other assets, net and other long-term liabilities, respectively, on our unaudited condensed consolidated balance sheet. There were no derivative contracts included in other assets, net or other long-term liabilities on our unaudited condensed consolidated balance sheet as of April 2, 2010.

The cash surrender value of life insurance represents insurance contracts held as assets in a rabbi trust to fund the Company’s deferred compensation plan. These assets are included in other assets, net on our unaudited condensed consolidated balance sheets. The cash surrender value of life insurance is based on the net asset values of the underlying funds available to plan participants.

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 July 2012. 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 Company’s 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 sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive income (“OCI”) and reclassified to earnings, in cost of goods sold, in the period that the hedged transaction is recognized in earnings. Cash flows associated with these contracts are classified as operating cash flows in the unaudited condensed

Form 10-Q
Page 9

consolidated statements of cash flows. Hedge ineffectiveness is evaluated using the hypothetical derivative method, and the ineffective portion of the hedge is reported in our unaudited condensed consolidated statements of operations in other, net. The amount of hedge ineffectiveness reported in other, net for the quarters ended April 1, 2011 and April 2, 2010 was not material.

The notional value of foreign currency forward sell contracts entered into as cash flow hedges is as follows:

		Notional Amount
Currency		April 1, 2011				December 31, 2010				April 2, 2010
Pound Sterling		$	23,509			$	23,536			$	22,093
Euro			78,219				88,414				64,743
Japanese Yen			26,045				22,817				17,075
Total		$	127,773			$	134,767			$	103,911
Latest Maturity Date		July 2012				January 2012				January 2011

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 unaudited condensed consolidated balance sheets, with changes in the fair value of these instruments recognized in earnings immediately. The gains or losses related to the contracts largely offset the remeasurement of those assets and liabilities. Cash flows associated with these contracts are classified as operating cash flows in the unaudited condensed consolidated statements of cash flows.

The notional value of foreign currency forward (buy) and sell contracts entered into to mitigate the foreign currency risk associated with certain balance sheet items is as follows (the contract amount represents the net amount of all purchase and sale contracts of a foreign currency):

		Notional Amount
Currency		April 1, 2011				December 31, 2010				April 2, 2010
Pound Sterling		$	13,738			$	9,312			$	(18,873	)
Euro			12,377				8,913				11,310
Japanese Yen			20,294				28,680				11,721
Canadian Dollar			4,661				6,013				6,439
Norwegian Kroner			3,769				2,219				4,779
Swedish Krona			3,128				2,601				2,779
Total		$	57,967			$	57,738			$	18,155
Sell Contracts		$	69,789			$	71,799			$	48,645
Buy Contracts			(11,822	)			(14,061	)			(30,490	)
Total Contracts		$	57,967			$	57,738			$	18,155
Latest Maturity Date		July 2011				April 2011				July 2010

Form 10-Q
Page 10

Fair Value of Derivative Instruments

The following table summarizes the fair values and presentation in the unaudited condensed consolidated balance sheets for derivative instruments, which consist of foreign exchange forward contracts, as of April 1, 2011, December 31, 2010 and April 2, 2010:

																		Liability
					Asset Derivatives													Derivatives
Balance Sheet Location		April 1, 2011				December 31, 2010				April 2, 2010				April 1, 2011				December 31, 2010				April 2, 2010
Derivatives designated as hedge instruments:
Derivative assets		$	-			$	-			$	5,246			$	-			$	-			$	20
Derivative liabilities			443				1,693				-				4,500				3,284				7
Other assets, net			158				6				-				33				5				-
Other long-term liabilities			-				67				-				11				178				-
		$	601			$	1,766			$	5,246			$	4,544			$	3,467			$	27
Derivatives not designated as hedge instruments:
Derivative assets		$	5			$	29			$	218			$	-			$	-			$	-
Derivative liabilities			103				6				-				462				105				53
		$	108			$	35			$	218			$	462			$	105			$	53
Total derivatives		$	709			$	1,801			$	5,464			$	5,006			$	3,572			$	80

The Effect of Derivative Instruments on the Statements of Operations for the Quarters Ended April 1, 2011 and April 2, 2010

														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								Accumulated OCI into				Income
Cash Flow		(Effective Portion)								Income				(Effective Portion)
Hedging Relationships		2011				2010				(Effective Portion)				2011				2010
Foreign exchange forward contracts		$	(5,306	)		$	5,600	(1)		Cost of goods sold				$	(3,048	)		$	1,333

 

(1)		Amount reported in the prior year of $4,958 was increased by $642 in the current year to $5,600. This amount represents the gain on derivatives recognized in other comprehensive income during the period and was changed to conform to the current period presentation.

The Company expects to reclassify pre-tax losses of $4,010 to the income statement within the next twelve months.

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						Amount of Gain/(Loss)
						Recognized in
Derivatives not Designated		Location of Gain/(Loss)Recognized				Income on Derivatives
as Hedging Instruments		In Income on Derivatives				2011				2010
Foreign exchange forward contracts		Other, net				$	45			$	(2,167	)

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 1, 2011 and April 2, 2010, respectively:

		For the Quarter Ended
		April 1, 2011				April 2, 2010
Cost of goods sold		$	57			$	82
Selling expense			1,114				499
General and administrative expense			2,440				977
Total share-based compensation		$	3,611			$	1,558

Long Term Incentive Programs

2011 Executive Long Term Incentive Program

On March 2, 2011, the Management Development and Compensation Committee of the Board of Directors (the “MDCC”) approved the terms of The Timberland Company 2011 Executive Long Term Incentive Program (“2011 LTIP”) with respect to equity awards to be made to certain of the Company’s executives and employees. On March 3, 2011, the Board of Directors also approved the 2011 LTIP with respect to the Company’s Chief Executive Officer. The 2011 LTIP was established under the Company’s 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 Company’s Class A Common Stock, and performance stock options (“PSOs”), with an exercise price of $38.52 (the closing price of the Company’s Class A Common Stock as quoted on the New York Stock Exchange on March 3, 2011, 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 Company’s achievement of certain levels of revenue growth and earnings before interest, taxes, depreciation and amortization (“EBITDA”), with threshold, 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, 2011 through December 31, 2013, and the performance period for the PSOs is the twelve-month period from January 1, 2011 through December 31, 2011. 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 3, 2011 grants is 252,600, which, if earned, will be settled in early 2014. Based on current estimates of the performance metrics, unrecognized compensation expense with respect to the 2011 PSUs was $4,495 as of April 1, 2011. 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 3, 2011 grants is 344,200, which, if earned, will be settled, subject to the vesting schedule noted above, in early 2012. Based on current estimates of the performance metrics, unrecognized compensation expense related to the 2011 PSOs was $3,198 as of April 1, 2011. This expense is expected to be recognized over a weighted-average remaining period of 3.9 years.

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2010 Executive Long Term Incentive Program

On March 3, 2010, the MDCC 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 Company’s executives and employees. On March 4, 2010, the Board of Directors also approved the 2010 LTIP with respect to the Company’s Chief Executive Officer.

The maximum number of shares to be awarded with respect to PSUs under the March 4, 2010 grants is 523,800, 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 $2,857 as of April 1, 2011. This expense is expected to be recognized over a weighted-average remaining period of 1.9 years.

Based on actual 2010 performance, the number of shares subject to exercise with respect to PSOs under the March 4, 2010 grants is 491,842, which shares were settled on March 3, 2011, subject to vesting in three equal annual installments.

2009 Executive Long Term Incentive Program

On March 4, 2009, the MDCC 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 Company’s executives and employees. On March 5, 2009, the Board of Directors also approved the 2009 LTIP with respect to the Company’s Chief Executive Officer.

The maximum number of shares to be awarded with respect to PSUs under the March 5, 2009 grants is 745,000, 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 $1,451 as of April 1, 2011. This expense is expected to be recognized over a weighted-average remaining period of 0.9 years.

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:

		2011 LTIP				2010 LTIP
		For the Quarter Ended				For the Quarter Ended
		April 1, 2011				April 2, 2010
Expected volatility			49.3	%			47.6	%
Risk-free interest rate			2.4	%			2.7	%
Expected life (in years)			6.2				6.2
Expected dividends			-				-

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The following summarizes activity associated with PSOs earned under the Company’s 2009 and 2010 LTIP and excludes the performance-based awards noted above under the 2011 LTIP for which performance conditions have not been met:

		Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2011			569,065			$	9.50
Settled			491,842				19.55
Exercised			(35,708	)			9.86
Expired or forfeited			(3,974	)			22.55
Outstanding at April 1, 2011			1,021,225			$	14.28				8.41			$	29,144
Vested or expected to vest at April 1, 2011			942,022			$	14.05				8.39			$	27,102
Exercisable at April 1, 2011			153,967			$	9.43				7.93			$	5,142

Unrecognized compensation expense related to these PSOs was $3,243 as of April 1, 2011. This expense is expected to be recognized over a weighted-average remaining period of 1.9 years.

Other Long Term Incentive Programs

During 2010, the MDCC approved a program to award cash or equity awards based upon the achievement of certain project milestones. Awards will be granted upon approval of performance criteria achievement by a steering committee designated by the Board of Directors, and, if equity based, will vest immediately upon achievement of certain project milestones. The Company expects the milestones to be achieved at various stages through 2013. The maximum aggregate value which may be earned by current plan participants in the program is $2,660, and the number of equity awards to be issued, if applicable, will be determined based on the fair market value of the Company’s Class A Common Stock on the date of issuance. Unrecognized compensation expense related to these awards was $1,491 as of April 1, 2011, and the expense is expected to be recognized over a weighted-average remaining period of 1.6 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 Company’s Long Term Incentive Programs discussed above:

		For the Quarter Ended
		April 1, 2011				April 2, 2010
Expected volatility			51.0	%			48.4	%
Risk-free interest rate			2.1	%			2.4	%
Expected life (in years)			5.0				5.0
Expected dividends			-				-

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The following summarizes transactions under stock option arrangements excluding awards under the 2009 and 2010 LTIP, which are summarized in the table above, and the performance-based awards under the 2011 LTIP noted above for which performance conditions have not been met:

		Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2011			3,659,924			$	25.29
Granted			61,300				38.52
Exercised			(1,187,883	)			26.14
Expired or forfeited			(19,437	)			29.81
Outstanding at April 1, 2011			2,513,904			$	25.18				5.2			$	44,336
Vested or expected to vest at April 1, 2011			2,472,410			$	25.18				5.1			$	43,614
Exercisable at April 1, 2011			2,082,723			$	26.36				4.5			$	34,290

Unrecognized compensation expense related to nonvested stock options was $2,396 as of April 1, 2011. This expense is expected to be recognized over a weighted-average remaining period of 1.6 years.

Nonvested Shares and Restricted Stock Units

There were 24,960 nonvested stock awards with a weighted-average grant date fair value of $9.34 outstanding on January 1, 2011. These awards vested in their entirety during the first quarter of 2011, and there is no unrecognized compensation expense associated with them.

Changes in the Company’s restricted stock units, excluding awards under the Company’s Long Term Incentive Programs discussed above, for the quarter ended April 1, 2011 are as follows:

		Stock Units				Weighted- Average Grant Date Fair Value
Nonvested at January 1, 2011			259,992			$	18.27
Awarded			30,386				38.52
Vested			(39,617	)			14.78
Forfeited			(967	)			15.91
Nonvested at April 1, 2011			249,794			$	21.30
Expected to vest at April 1, 2011			228,546			$	20.88

Unrecognized compensation expense related to nonvested restricted stock units was $3,197 as of April 1, 2011 and the expense is expected to be recognized over a weighted-average remaining period of 1.6 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.

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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 1, 2011 and April 2, 2010:

		For the Quarter Ended
					April 1, 2011									April 2, 2010
						Weighted-				Per-								Weighted-				Per-
		Net				Average				Share				Net				Average				Share
		Income				Shares				Amount				Income				Shares				Amount
Basic EPS		$	17,971				50,912			$	.35			$	25,747				54,166			$	.48
Effect of dilutive securities:
Stock options and employee stock purchase plan shares			-				877				-				-				289				(.01	)
Nonvested shares			-				215				-				-				188				-
Diluted EPS		$	17,971				52,004			$	.35			$	25,747				54,643			$	.47

The following stock options and nonvested shares (in thousands) were outstanding as of April 1, 2011 and April 2, 2010, but were not included in the computation of diluted EPS as their inclusion would be anti-dilutive:

		For the Quarter Ended
		April 1, 2011				April 2, 2010
Anti-dilutive securities		745				2,918

Note 6. Comprehensive Income

Comprehensive income for the quarters ended April 1, 2011 and April 2, 2010 is as follows:

		For the Quarter Ended
		April 1, 2011				April 2, 2010
Net income			$17,971				$25,747
Change in cumulative translation adjustment			4,979				(7,478	)
Change in fair value of cash flow hedges, net of taxes			(2,145	)			4,054
Change in other adjustments, net of taxes			(55	)			(52	)
Comprehensive income			$20,750				$22,271

The components of accumulated other comprehensive income as of April 1, 2011, December 31, 2010 and April 2, 2010 were:

		April 1, 2011				December 31, 2010					April 2, 2010
Cumulative translation adjustment		$	13,002				$8,023					$6,175
Fair value of cash flow hedges, net of taxes of $(197) at April 1, 2011, $(84) at December 31, 2010 and $261 at April 2, 2010			(3,736	)			(1,591)					4,958
Other adjustments, net of taxes of $58 at April 1, 2011, $96 at December 31, 2010 and $99 at April 2, 2010			184				239					439
Total		$	9,450				$6,671					$11,572

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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 Company’s chief operating decision maker.

The North America segment is comprised of the sale of products to wholesale and retail customers in North America. It includes Company-operated specialty and factory outlet stores in the United States and our United States e-commerce business. This segment also includes royalties from licensed products sold worldwide, the related management costs and expenses associated with our worldwide licensing efforts, and certain marketing expenses and value-added services.

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.

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. 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 equipment.

For the Quarters Ended April 1, 2011 and April 2, 2010

														Unallocated
		North America				Europe				Asia				Corporate				Consolidated
2011
Revenue		$	131,983			$	165,705			$	51,316			$	-			$	349,004
Operating income/(loss)			21,287				28,882				8,246				(30,530	)			27,885
Income/(loss) before income taxes			21,287				28,882				8,246				(28,906	)			29,509
Total assets			242,468				323,758				81,112				237,083				884,421
Goodwill			31,964				6,994				-				-				38,958
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

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The following summarizes our revenue by product for the quarters ended April 1, 2011 and April 2, 2010:

		For the Quarter Ended
		April 1, 2011				April 2, 2010
Footwear		$	248,168			$	225,561
Apparel and accessories			94,248				85,689
Royalty and other			6,588				5,792
Total		$	349,004			$	317,042

Note 8. Inventory

Inventory consists of the following:

		April 1, 2011				December 31, 2010				April 2, 2010
Materials		$	11,024			$	11,299			$	8,442
Work-in-process			1,632				841				1,165
Finished goods			174,206				167,928				127,334
Total		$	186,862			$	180,068			$	136,941

Note 9. Goodwill and Intangibles

A summary of goodwill activity follows:

		2011												2010
						Accumulated				Net Book								Accumulated				Net Book
		Gross				Impairment				Value				Gross				Impairment				Value
Balance at January 1		$	44,353			$	(5,395	)		$	38,958			$	44,353			$	-			$	44,353
Impairment charges			-				-				-				-				-				-
Balance at end of period		$	44,353			$	(5,395	)		$	38,958			$	44,353			$	-			$	44,353

Intangible assets consist of trademarks and other intangible assets. Other intangible assets consist of customer, patent and non-competition related intangible assets. Intangible assets consist of the following:

		April 1, 2011												December 31, 2010
						Accumulated				Net Book								Accumulated				Net Book
		Gross				Amortization				Value				Gross				Amortization				Value
Trademarks (indefinite-lived)		$	32,442			$	-			$	32,442			$	32,402			$	-			$	32,402
Trademarks (finite-lived)			3,619				(2,128	)			1,491				4,064				(2,462	)			1,602
Other intangible assets (finite-lived)			5,722				(5,065	)			657				5,995				(5,160	)			835
Total		$	41,783			$	(7,193	)		$	34,590			$	42,461			$	(7,622	)		$	34,839

Note 10. Income Taxes

We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period they occur. During the first quarter of 2011, the Company recorded a charge of approximately $2,250 to income tax expense related to certain prior year matters.

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

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Company was required to make payments to the Internal Revenue Department of Hong Kong totaling approximately $8,400, of which approximately $900 was paid in the first quarter of 2010. These payments are included in prepaid taxes on our unaudited condensed consolidated balance sheet. We believe we have a sound defense to the proposed adjustment and will continue to firmly oppose the assessment. We believe that the assessment does not impact the level of liabilities for our income tax contingencies. However, actual resolution may differ from our current estimates, and such differences could have a material impact on our future effective tax rate and our results of operations.

Note 11. Stockholders’ Equity

On December 3, 2009, our Board of Directors approved the repurchase of up to 6,000,000 shares of our Class A Common Stock. There were no share repurchases made for the quarter ended April 1, 2011. As of April 1, 2011, 2,897,437 shares remained available for repurchase under the authorization.

From time to time, we use plans adopted under Rule 10b5-1 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, to facilitate share repurchases.

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.

Note 13. Subsequent Events

On April 26, 2011, we entered into a Third Amended and Restated Revolving Credit Agreement with a group of banks led by Bank of America, N.A. (the “Agreement”). The Agreement amends and restates in its entirety the Second Amended and Restated Revolving Credit Agreement dated as of June 2, 2006. The Agreement expires on April 26, 2016. The Agreement provides for $200 million of committed, unsecured borrowings, of which up to $125 million may be used for letters of credit. Upon the approval of the bank group, the Company may increase the committed borrowing limit by $100 million for a total commitment of $300 million. This facility may be used for working capital, share repurchases, acquisitions and other general corporate purposes. Under the terms of the Agreement, the Company may borrow at interest rates based on Eurodollar rates, plus an applicable margin of between 87.5 and 175.0 basis points based on a fixed charge coverage grid. In addition, the Company will pay a commitment fee of 12.5 to 25 basis points per annum on the total commitment, based on a fixed charge coverage grid that is adjusted quarterly. The financial covenants set forth in the Agreement relate to maintaining a minimum fixed charge coverage ratio of 2.25:1 and a leverage ratio of 2:1. The Company will measure compliance with the financial and non-financial covenants and ratios as required by the terms of the Agreement on a fiscal quarter basis. The Agreement also contains certain customary affirmative and negative covenants.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s 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 Company’s 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, 2010.

Included herein are discussions and reconciliations of Total Company, Europe and Asia revenue changes to constant dollar revenue changes. Constant dollar revenue changes, which exclude the impact of changes in foreign exchange rates, are not Generally Accepted Accounting Principle (''GAAP’’) performance measures. The difference between changes in reported revenue (the most comparable GAAP measure) and constant dollar revenue changes is the impact of foreign currency exchange rate fluctuations. We calculate constant dollar revenue changes by recalculating current year revenue using the prior year’s exchange rates and comparing it to the prior year revenue reported on a GAAP basis. We provide constant dollar revenue changes for Total

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Company, Europe and Asia results because we use the measure to understand the underlying results and trends of the business segments excluding the impact of exchange rate changes that are not under management’s direct control. The limitation of this measure is that it excludes exchange rate changes that have an impact on the Company’s revenue. This limitation is best addressed by using constant dollar revenue changes in combination with revenue reported on a GAAP basis. We have a foreign exchange rate risk management program intended to minimize both the positive and negative effects of currency fluctuations on our reported consolidated results of operations, financial position and cash flows. The actions we take to mitigate foreign exchange risk are reflected in cost of goods sold and other, net.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to sales returns and allowances, realization of outstanding accounts receivable, 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. Notwithstanding the foregoing, 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 Company’s consolidated financial statements included in Part II, Item 8: Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2010. Our estimates, assumptions and judgments involved in applying the critical accounting policies are described in Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

Our principal strategic goal is to become the #1 Outdoor Brand on Earth 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 Timberland^â 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 brand’s 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 2011 financial performance, compared to the first quarter of 2010, follows:

	•		First quarter revenue increased 10.1%, or 8.5% on a constant dollar basis, to $349.0 million.
	•		Gross margin decreased 300 basis points to 46.8%.
	•		Operating income was $27.9 million, compared to $39.4 million in the first quarter of 2010.
	•		Net income was $18.0 million, compared to $25.7 million in the first quarter of 2010.
	•		Diluted earnings per share decreased to $0.35 from $0.47.
	•		Cash at the end of the quarter was $265.3 million with no debt outstanding.

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We are undertaking a multi-year business system transformation initiative, pursuant to which we will develop and implement an integrated enterprise resource planning, or ERP, system to better support our business model and further streamline our operations. The Company incurred incremental expenses of approximately $1.0 million during the quarter ended April 1, 2011 related to this ERP implementation, as well as $3.1 million in capital spending, primarily related to software implementation and hardware.

Results of Operations for the Quarter Ended April 1, 2011 as Compared to the Quarter Ended April 2, 2010

Revenue

In the first quarter of 2011, our consolidated revenues grew 10.1% to $349.0 million, reflecting growth across North America, Europe and Asia and favorable foreign exchange rate impacts. We experienced strong growth in each of our core European markets with the exception of the U.K., which decreased compared to the prior year quarter. Taiwan, Hong Kong, and China drove the favorable year over year comparison in Asia, partially offset by declines in Japan. On a constant dollar basis, consolidated revenues increased 8.5%.

Products

By product group, our footwear revenues increased 10.0% to $248.2 million compared to the prior year period, and apparel and accessories revenues grew 10.0% to $94.2 million. Growth in footwear revenues was driven primarily by improved wholesale revenue results in Europe and North America, as well as benefits from foreign exchange. The improvement in apparel and accessories revenues compared to the prior year reflects apparel revenue growth in Asia, in our own stores and through our wholesale partners, as well as growth in accessories revenue in Europe and North America. Royalty and other revenue increased $0.8 million, or 13.7%, to $6.6 million compared to the prior year period.

Channels

Wholesale revenue was $252.0 million in the first quarter of 2011, an 8.6% increase compared to the prior year quarter. During the quarter, we saw strong growth in Europe and North America and flat performance in Asia. Retail revenues grew 14.0% to $97.0 million in the first quarter of 2011, driven by solid comparable store sales growth, the net addition of 8 stores and favorable foreign exchange rate impacts.

Comparable store sales were up 8.2% compared to the first quarter of 2010, reflecting strong growth in North America and Asia. Comparable store sales include revenues from Company-operated stores for which all of the following requirements have been met: the store has been open at least one year, square footage has not changed by more than 25% within the past year, and the store has not been permanently repositioned within the past year. Sales for stores that are closed for renovation or relocation are excluded from the comparable store calculation until such stores are reopened. Prior year foreign exchange rates are applied to both current year and prior year comparable store sales to achieve a consistent basis for comparison.

We had 229 Company-owned stores, shops and outlets worldwide at the end of the first quarter of 2011 compared to 221 at the end of the first quarter of 2010.

Gross Profit

Gross profit as a percentage of sales, or gross margin, was 46.8% for the first quarter of 2011, a 300 basis point decline compared to the first quarter of 2010. The decrease in gross margin reflects higher product costs associated with leather and non-leather materials, transportation and labor. The Company expects these costs to continue to adversely impact gross margin through 2011, although price increases will help to mitigate the impact of these costs in the second half of 2011.

Operating Expense

Operating expense for the first quarter of 2011 was $135.4 million, an increase of $16.8 million, or 14.2%, when compared to the first quarter of 2010. As a percentage of sales, operating expense was 38.8% compared to 37.4% in the prior year period. The increase reflects an increase of $10.4 million in selling expense and $6.4 million in general and administrative expense. Foreign exchange rate impacts increased selling and general and administrative expenses by approximately $2.2 million in the first quarter of 2011. Operating expense in the first quarter of 2010 included a $1.5 million gain related to the termination of a licensing agreement.

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Selling expense was $103.1 million in the first quarter of 2011, an increase of 11.2% over the same period in 2010. The increase in selling expense reflects planned investments in retail and advertising, variable costs associated with strong revenue growth and higher incentive compensation costs.

We include the costs of physically managing inventory (warehousing and handling costs) in selling expense. These costs totaled $8.9 million and $8.4 million in the first quarters of 2011 and 2010, respectively.

In each of the first quarters of 2011 and 2010, we recorded $0.7 million of reimbursed shipping expenses within revenues and the related shipping costs within selling expense. Shipping costs are included in selling expense and were $5.4 million and $5.2 million for the quarters ended April 1, 2011 and April 2, 2010, respectively.

Advertising expense, which is included in selling expense, was $5.1 million and $3.9 million in the first quarters of 2011 and 2010, respectively. 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 1, 2011 and April 2, 2010 was $2.6 million and $1.3 million, respectively.

General and administrative expense for the first quarter of 2011 was $32.3 million, compared to the $25.9 million reported in the first quarter of 2010, driven by increases in incentive compensation and other employee related costs of $3.9 million and incremental costs of $1.0 million related to our business system transformation initiatives. Additionally, general and administrative expense in the first quarter of 2010 included a gain of $1.5 million associated with the termination of a licensing agreement.

Operating Income/(Loss)

We recorded operating income of $27.9 million in the first quarter of 2011, compared to operating income of $39.4 million in the prior year period. Operating income in the first quarter of 2010 included a gain of $1.5 million associated with the termination of a licensing agreement.

Other Income/(Expense) and Taxes

Interest income was $0.1 million in each of the first quarters of 2011 and 2010. Interest expense, which is comprised of fees related to the establishment and maintenance of our revolving credit facility, was $0.2 million and $0.1 million in the first quarters of 2011 and 2010, respectively.

Other, net, included foreign exchange gains of $1.6 million in the first quarter of 2011 compared to foreign exchange losses of $0.4 million in the first quarter of 2010, 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 2011 and 2010 and should not be considered indicative of expected future results.

The effective income tax rate for the first quarter of 2011 was 39.1%. During the first quarter of 2011, the Company recorded a charge of approximately $2.2 million to income tax expense related to certain prior year matters. The Company anticipates that its effective tax rate for 2011 will be lower than its overall statutory rate of 39%. The effective income tax rate for the first quarter of 2010 was 34.3%.

In December 2009, we received a Notice of Assessment from the Internal Revenue Department of Hong Kong for approximately $17.6 million with respect to the tax years 2004 through 2008. In connection with the assessment, the Company was required to make payments to the Internal Revenue Department of Hong Kong totaling approximately $8.4 million in 2010, of which $0.9 million was paid in the first quarter of 2010. These payments are included in prepaid taxes on our unaudited condensed consolidated balance sheet. 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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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.

Revenue by segment for the quarter ended April 1, 2011 compared to the quarter ended April 2, 2010 is as follows (dollars in millions):

		For the Quarter Ended
		April 1,				April 2,
		2011				2010				% Change
North America		$	132.0			$	121.9				8.3	%
Europe			165.7				151.6				9.3
Asia			51.3				43.5				17.8
		$	349.0			$	317.0				10.1

Operating income/(loss) by segment and as a percentage of revenue for the quarters ended April 1, 2011 and April 2, 2010 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 1,								April 2,
		2011								2010
North America		$	21.3				16.1	%		$	21.6				17.8	%
Europe			28.9				17.4				37.3				24.6
Asia			8.2				16.1				6.9				15.7
Unallocated Corporate			(30.5	)			(8.7	)			(26.4	)			(8.3	)
		$	27.9				8.0			$	39.4				12.4

North America

North America revenues were $132.0 million in the first quarter of 2011, an increase of 8.3% as compared to the same period in 2010. The results reflect solid growth from our Timberland^® and Timberland PRO^® footwear, as well as SmartWool^® accessories. Within North America, revenue from our retail business grew 8.3%, driven by a 9.6% increase in comparable store sales. We had 64 stores at April 1, 2011 compared to 67 stores at April 2, 2010.

Operating income for our North America segment was $21.3 million, compared to $21.6 million for the first quarter of 2010. A 7.1% increase in operating expenses was partially offset by improved gross profit, where benefits from increased volume and more profitable product mix offset the impact of a rate decline from higher product costs. Operating expenses increased due to higher volume-related selling expenses and the impact in 2010 of a $1.5 million gain associated with the termination of a licensing agreement.

Europe

Europe recorded revenues of $165.7 million in the first quarter of 2011, a 9.3% increase from the first quarter of 2010, and an increase of 8.3% on a constant dollar basis. Growth across Southern and Central Europe, as well as Scandinavia, was partially offset by a decline in the U.K. Wholesale showed strong growth in men’s footwear, while growth in retail was driven by apparel sales. Retail growth of 9.2% was driven by the net addition of 4 stores, as well as comparable store sales growth of 1.7%. Comparable store growth in outlet stores was partially offset by declines in our specialty stores. We had 67 stores at April 1, 2011 compared to 63 stores at April 2, 2010.

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Timberland’s European segment recorded operating income of $28.9 million in the first quarter of 2011, compared to operating income of $37.3 million in the first quarter of 2010. Declines in Europe were driven by lower gross margin and a 10.7% increase in operating expense. Gross margin declines reflect higher product costs, unfavorable product mix, and the impact of foreign exchange. Operating expense increases were driven primarily by employee-related costs, selling expense, and higher rent and occupancy costs from store expansion and volume.

Asia

In Asia, revenues increased 17.8%, or 10.0% in constant dollars, to $51.3 million in the first quarter of 2011 due to strong retail performance of apparel and men’s footwear. Retail revenues were up 30.0%, driven by favorable foreign exchange rate impacts and retail expansion in Hong Kong and Taiwan. Comparable store sales grew 15.4%. We had 98 stores at April 1, 2011 compared to 91 stores at April 2, 2010.

We had operating income in our Asia segment of $8.2 million for the first quarter of 2011, compared to operating income of $6.9 million for the first quarter of 2010. Improvement in gross margin reflects favorable foreign exchange rate and mix impacts, partially offset by higher product costs. This improvement was partially offset by an increase in operating expense of 24.9% due to higher rent and occupancy costs from store expansion and volume, and higher employee-related costs.

In March 2011, an earthquake occurred off the northeast coast of Japan. The Company’s organization and assets in Japan were not materially damaged by the earthquake and resultant tsunami. However, the implications of these events and the resulting damage to Japan’s infrastructure, consumer confidence, and overall economy remain unclear. While we cannot yet fully assess the impact on our Japan business, we believe there could be a negative impact on our revenues and profits for this geography throughout the remainder of fiscal 2011 and into fiscal 2012.

Corporate Unallocated

Our Unallocated Corporate expenses increased 15.8% to $30.5 million in the first quarter of 2011. Unallocated Corporate expenses include central support and administrative costs, as well as supply chain costs, including sourcing and logistics, inventory cost variances and adjustments to standard costs, which are not allocated to our reportable business segments. The increase in costs reflects higher incentive compensation costs, incremental costs related to business system transformation initiatives, partially offset by favorability in our inventory standard cost adjustment compared to the adjustment made in the prior year period.

Reconciliation of Total Company, Europe and Asia Revenue Changes To Constant Dollar Revenue Changes

Total Company Revenue Reconciliation:

		For the Quarter
		Ended April 1, 2011
		$ Change
		(millions)				% Change
Revenue increase (GAAP)		$	32.0				10.1	%
Increase due to foreign exchange rate changes			5.1				1.6	%
Revenue increase in constant dollars		$	26.9				8.5	%

Europe Revenue Reconciliation:

		For the Quarter
		Ended April 1, 2011
		$ Change
		(millions)				% Change
Revenue increase (GAAP)		$	14.0				9.3	%
Increase due to foreign exchange rate changes			1.4				1.0	%
Revenue increase in constant dollars		$	12.6				8.3	%

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Asia Revenue Reconciliation:

		For the Quarter
		Ended April 1, 2011
		$ Change
		(millions)				% Change
Revenue increase (GAAP)		$	7.7				17.8	%
Increase due to foreign exchange rate changes			3.4				7.8	%
Revenue increase in constant dollars		$	4.3				10.0	%

The difference between changes in reported revenue (the most comparable GAAP measure) and constant dollar revenue changes is the impact of foreign currency exchange rates. We calculate constant dollar revenue changes by recalculating current year revenue using the prior year’s exchange rates and comparing it to the prior year revenue reported on a GAAP basis. We provide constant dollar revenue changes for Total Company, Europe and Asia results because we use the measure to understand the underlying results and trends of the business segments excluding the impact of exchange rate changes that are not under management’s direct control. We have a foreign exchange rate risk management program intended to minimize both the positive and negative effects of currency fluctuations on our reported consolidated results of operations, financial position and cash flows. The actions taken by us to mitigate foreign exchange risk are reflected in cost of goods sold and other, net.

Accounts Receivable and Inventory

Accounts receivable were $178.5 million as of April 1, 2011, compared with $188.3 million at December 31, 2010 and $157.6 million at April 2, 2010, an increase of 13.2% as compared to the prior year quarter, driven primarily by revenue growth of 10.1% and timing of sales. Day’s sales outstanding were 46 days as of April 1, 2011, compared with 35 days as of December 31, 2010 and 45 days as of April 2, 2010. Wholesale day’s sales outstanding were 53 days as of April 1, 2011, compared with 44 days as of December 31, 2010 and 51 days as of April 2, 2010. The increase in day’s sales outstanding is attributable to the timing of sales and lower doubtful account requirements.

Inventory was $186.9 million as of April 1, 2011, compared with $180.1 million as of December 31, 2010 and $136.9 million as of April 2, 2010. The increase of 36.5% over a low level in the prior year quarter is the result of expected growth for the business in 2011, increased product costs, and efforts to secure product in advance of potential factory capacity constraints.

Liquidity and Capital Resources

Net cash used by operations for the first quarter of 2011 was $34.3 million, compared with $26.3 million for the first quarter of 2010. The increase in cash used by operations was driven primarily by a decrease in net income. Overall, in 2011 we invested $66.4 million in operating assets and liabilities compared to an investment of $62.5 million in the first quarter of 2010, reflecting higher inventory investment to support our expected growth.

Net cash used by investing activities was $8.0 million in the first quarter of 2011, compared with $2.8 million in the first quarter of 2010. Capital spending totaled $8.7 million in the first quarter of 2011 compared to $2.8 million in the first quarter of 2010. The increase was driven by capital spending associated with our multi-year business systems transformation initiative, as well as sourcing, logistics and retail related investments.

Net cash provided by financing activities was $33.9 million in the first quarter of 2011, compared with $18.9 million of cash used by financing activities in the first quarter of 2010. Cash flows for financing activities reflected share repurchases of $0.9 million in the first quarter of 2011, compared with $19.5 million in the first quarter of 2010. We received cash inflows of $31.4 million in the first quarter of 2011 from the exercise of employee stock options, compared with $0.7 million from such exercises in the first quarter of 2010.

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 rate 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

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Page 25

are executed with a group of major financial institutions and have varying maturities through July 2012. 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. 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.

At the end of the first quarter of 2011, we had an unsecured committed revolving credit agreement with a group of banks, which matures on June 2, 2011 (the “Agreement”). The Agreement provided for $200 million of committed borrowings, of which up to $125 million could be used for letters of credit. Any letters of credit outstanding under the Agreement ($1.6 million at April 1, 2011) reduced the amount available for borrowing under the Agreement. Upon approval of the bank group, we could increase the committed borrowing limit by $100 million for a total commitment of $300 million. Under the terms of the Agreement, we could borrow at interest rates based on Eurodollar rates (approximately 0.3% at April 1, 2011), 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 1, 2011, the applicable margin under the facility was 47.5 basis points. We paid a utilization fee of an additional 5 basis points if our outstanding borrowings under the facility exceed $100 million. We also paid 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 1, 2011, the commitment fee was 15 basis points. The Agreement placed certain limitations on additional debt, stock repurchases, acquisitions, and the amount of dividends we could pay, and included certain other financial and non-financial covenants. The primary financial covenants related to maintaining a minimum fixed-charge coverage ratio of 2.25:1 and a maximum leverage ratio of 2:1. We measured compliance with the financial and non-financial covenants and ratios as required by the terms of the Agreement on a fiscal quarter basis.

On April 26, 2011, we entered into an amended and restated unsecured revolving credit facility with a group of banks (the “New Agreement”). The New Agreement, which will expire on April 26, 2016, amends and restates the Agreement. Borrowing availability and financial covenants in the New Agreement are substantially similar to those under the Agreement. Under the terms of the New Agreement, we may borrow at interest rates based on Eurodollar rates plus an applicable margin based on a fixed-charge coverage grid of between 87.5 and 175 basis points that is adjusted quarterly. We will also pay a commitment fee of 12.5 to 25 basis points per annum on the total commitment, based on a fixed-charge coverage grid that is adjusted quarterly.

We have uncommitted lines of credit available from certain banks which totaled $30 million at April 1, 2011. 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.

We had no borrowings outstanding under any of our credit facilities during, or as of, the quarters ended April 1, 2011 and April 2, 2010.

Management believes that our operating costs, capital requirements and funding for our share repurchase program for the balance of 2011 will be funded through our current cash balances, our credit facilities and cash from operations, without the need for additional financing. We are undertaking a multi-year Business Transformation Initiative pursuant to which we will develop and implement an ERP system to better support our business model and further streamline our operations. It is the Company’s intent to finance these costs with cash from operations, without the need for additional financing. However, as discussed in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” 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.