e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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X |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2011
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-9548
(Exact name of registrant as specified in its charter)
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Delaware
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02-0312554 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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200 Domain Drive, Stratham, New Hampshire
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03885 |
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(Address of principal executive offices)
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(Zip Code) |
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Registrants telephone number, including area code:
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(603) 772-9500
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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.
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Large Accelerated Filer x
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Accelerated Filer o |
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Non-Accelerated Filer o |
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
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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
July 29, 2011, 40,271,813 shares of the registrants Class A Common Stock were outstanding and
10,568,389 shares of the registrants Class B Common Stock were outstanding.
Form 10-Q
Page 2
THE TIMBERLAND COMPANY
FORM 10-Q
TABLE OF CONTENTS
Form 10-Q
Page 3
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
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, 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
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 or previously filed
Quarterly Reports 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.
Form 10-Q
Page 4
PART I FINANCIAL INFORMATION
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Item 1. |
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FINANCIAL STATEMENTS |
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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July 1, |
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December 31, |
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July 2, |
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2011 |
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2010 |
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2010 |
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Assets |
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Current assets |
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Cash and equivalents |
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$233,800 |
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$272,221 |
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$237,798 |
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Accounts receivable, net of allowance for doubtful accounts of $7,577 at
July 1, 2011, $10,859 at December 31, 2010 and $11,130 at July 2, 2010 |
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116,701 |
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188,336 |
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86,836 |
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Inventory |
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251,720 |
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180,068 |
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177,206 |
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Prepaid expense |
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32,748 |
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32,729 |
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31,506 |
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Prepaid income taxes |
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36,245 |
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25,083 |
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27,244 |
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Deferred income taxes |
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19,343 |
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22,562 |
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27,085 |
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Derivative assets |
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51 |
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29 |
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7,882 |
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Total current assets |
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690,608 |
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721,028 |
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595,557 |
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Property, plant and equipment and capitalized software costs, net |
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78,411 |
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68,043 |
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64,502 |
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Deferred income taxes |
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10,148 |
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15,594 |
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18,683 |
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Goodwill |
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38,958 |
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38,958 |
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38,958 |
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Intangible assets, net |
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33,630 |
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34,839 |
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36,195 |
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Other assets, net |
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18,264 |
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13,897 |
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12,670 |
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Total assets |
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$870,019 |
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$892,359 |
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$766,565 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$110,156 |
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$91,025 |
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$78,946 |
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Accrued expense |
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Payroll and related |
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30,262 |
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47,376 |
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27,678 |
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Other |
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59,594 |
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80,675 |
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52,877 |
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Income taxes payable |
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5,172 |
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25,760 |
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15,330 |
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Deferred income taxes |
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- |
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- |
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388 |
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Derivative liabilities |
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6,870 |
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1,690 |
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91 |
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Total current liabilities |
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212,054 |
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246,526 |
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175,310 |
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Other long-term liabilities |
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38,858 |
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34,322 |
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38,234 |
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Commitments and contingencies (See Note 13)
Stockholders equity |
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Preferred Stock, $.01 par value; 2,000,000 shares authorized; none issued |
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- |
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- |
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- |
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Class A Common Stock, $.01 par value (1 vote per share); 120,000,000
shares authorized; 77,091,327 shares issued at July 1, 2011, 75,543,672
shares issued at December 31, 2010 and 75,072,360 shares issued at July
2, 2010 |
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771 |
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756 |
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751 |
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Class B Common Stock, $.01 par value (10 votes per share); convertible
into Class A shares on a one-for-one basis; 20,000,000 shares
authorized; 10,568,389 shares issued and outstanding at July 1, 2011,
10,568,389 shares issued and outstanding at December 31, 2010 and
10,889,160 shares issued and outstanding at July 2, 2010 |
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106 |
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106 |
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109 |
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Additional paid-in capital |
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328,503 |
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280,154 |
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272,820 |
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Retained earnings |
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1,069,170 |
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1,071,305 |
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976,978 |
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Accumulated other comprehensive income |
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9,254 |
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6,671 |
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9,478 |
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Treasury Stock at cost; 36,845,309 Class A shares at July 1, 2011,
35,610,050 Class A shares at December 31, 2010 and 33,511,452 Class A
shares at July 2, 2010 |
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(788,697 |
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(747,481 |
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(707,115 |
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Total stockholders equity |
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619,107 |
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611,511 |
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553,021 |
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Total liabilities and stockholders equity |
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$870,019 |
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$892,359 |
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$766,565 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
Form 10-Q
Page 5
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
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For the Quarter Ended |
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For the Six Months Ended |
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July 1, 2011 |
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July 2, 2010 |
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July 1, 2011 |
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July 2, 2010 |
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Revenue |
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$240,127 |
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$188,954 |
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$589,131 |
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$505,996 |
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Cost of goods sold |
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126,309 |
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95,446 |
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311,999 |
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254,505 |
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Gross profit |
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113,818 |
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93,508 |
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277,132 |
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251,491 |
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Operating expense |
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Selling |
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107,664 |
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86,124 |
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210,740 |
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178,820 |
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General and administrative |
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36,330 |
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28,942 |
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68,683 |
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56,341 |
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Impairment of goodwill |
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- |
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5,395 |
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- |
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5,395 |
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Impairment of intangible assets |
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736 |
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7,854 |
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736 |
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7,854 |
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Gain on termination of licensing agreements |
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- |
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(1,500 |
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- |
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(3,000 |
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Total operating expense |
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144,730 |
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126,815 |
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280,159 |
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245,410 |
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Operating income/(loss) |
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(30,912 |
) |
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(33,307 |
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(3,027 |
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6,081 |
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Other income/(expense), net |
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Interest income |
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155 |
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148 |
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285 |
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221 |
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Interest expense |
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(128 |
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(142 |
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(315 |
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(281 |
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Other, net |
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1,140 |
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269 |
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2,821 |
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136 |
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Total other income/(expense), net |
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1,167 |
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275 |
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2,791 |
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76 |
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Income/(loss) before income taxes |
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(29,745 |
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(33,032 |
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(236 |
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6,157 |
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Income tax provision/(benefit) |
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(9,639 |
) |
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(9,580 |
) |
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1,899 |
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3,862 |
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Net income/(loss) |
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$(20,106 |
) |
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$(23,452 |
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$(2,135 |
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$2,295 |
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Earnings/(Loss) per share |
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Basic |
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$(.39 |
) |
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$(.44 |
) |
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$(.04 |
) |
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$.04 |
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Diluted |
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$(.39 |
) |
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$(.44 |
) |
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$(.04 |
) |
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$.04 |
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Weighted-average shares outstanding |
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Basic |
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51,191 |
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53,225 |
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51,052 |
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53,698 |
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Diluted |
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51,191 |
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53,225 |
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51,052 |
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54,184 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 6
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
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For the Six Months Ended |
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July 1, 2011 |
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July 2, 2010 |
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Cash flows from operating activities: |
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Net income/(loss) |
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$(2,135 |
) |
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$2,295 |
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Adjustments to reconcile net income/(loss) to net cash provided/(used) by
operating activities: |
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Deferred income taxes |
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9,929 |
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(4,811 |
) |
Share-based compensation |
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6,993 |
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3,647 |
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Depreciation and amortization |
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13,033 |
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13,053 |
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Provision for losses on accounts receivable |
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316 |
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1,584 |
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Impairment of goodwill |
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- |
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5,395 |
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Impairment of intangible assets |
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|
736 |
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7,854 |
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Excess tax benefit from share-based compensation |
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(5,116 |
) |
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(303 |
) |
Unrealized (gain)/loss on derivatives |
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283 |
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(176 |
) |
Other non-cash charges/(credits), net |
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(32 |
) |
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222 |
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Increase/(decrease) in cash from changes in operating assets and liabilities: |
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Accounts receivable |
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75,438 |
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53,559 |
|
Inventory |
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(71,005 |
) |
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(20,139 |
) |
Prepaid expense and other assets |
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(1,954 |
) |
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|
1,429 |
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Accounts payable |
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19,416 |
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|
(700 |
) |
Accrued expense |
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(41,607 |
) |
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|
(43,006 |
) |
Prepaid income taxes |
|
|
(11,163 |
) |
|
|
(15,451 |
) |
Income taxes payable |
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(15,527 |
) |
|
|
(3,611 |
) |
Other liabilities |
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|
2,160 |
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|
205 |
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Net cash provided/(used) by operating activities |
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(20,235 |
) |
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|
1,046 |
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Cash flows from investing activities: |
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Additions to property, plant and equipment |
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(19,236 |
) |
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(7,289 |
) |
Other |
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(499 |
) |
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(116 |
) |
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Net cash used by investing activities |
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(19,735 |
) |
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(7,405 |
) |
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Cash flows from financing activities: |
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Common stock repurchases |
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(40,939 |
) |
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(44,220 |
) |
Issuance of common stock |
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|
36,499 |
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|
2,435 |
|
Excess tax benefit from share-based compensation |
|
|
5,116 |
|
|
|
587 |
|
Other |
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(1,195 |
) |
|
|
(634 |
) |
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Net cash used by financing activities |
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(519 |
) |
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|
(41,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents |
|
|
2,068 |
|
|
|
(3,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and equivalents |
|
|
(38,421 |
) |
|
|
(52,041 |
) |
Cash and equivalents at beginning of period |
|
|
272,221 |
|
|
|
289,839 |
|
|
|
|
|
|
|
|
Cash and equivalents at end of period |
|
|
$233,800 |
|
|
|
$237,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
|
$282 |
|
|
|
$276 |
|
Income taxes paid |
|
|
$19,088 |
|
|
|
$26,891 |
|
Non-cash investing activity (ERP system costs on account) |
|
|
$3,027 |
|
|
|
$- |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form10-Q
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, 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 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 second quarters of
our fiscal year in 2011 and 2010 ended on July 1, 2011 and July 2, 2010, respectively.
Acquisition by V.F. Corporation
On June 12, 2011, the Company entered into an Agreement and Plan of Merger (the Merger Agreement)
with V.F. Corporation (VF) and VF Enterprises, Inc., a wholly owned subsidiary of VF (Merger
Sub). The Merger Agreement provides that, upon the terms and subject to the conditions set forth
in the Merger Agreement, Merger Sub will merge with and into the Company (the Merger), with the
Company continuing as the surviving corporation and a wholly owned subsidiary of VF. Holders of
the outstanding shares of the Companys common stock at the effective time of the Merger will
receive $43.00 per share in cash.
Concurrent with the execution of the Merger Agreement, Sidney W. Swartz, Chairman of the Companys
Board of Directors, Jeffrey B. Swartz, President and Chief Executive Officer of the Company, and
certain other members of their families and certain trusts established for the benefit of their
families or for charitable purposes (collectively, the Supporting Stockholders), who collectively
control approximately 73.5% of the combined voting power of the Companys outstanding Class A and
Class B common stock, entered into a Voting Agreement (the Voting Agreement) with VF. The Voting
Agreement provided that, so long as the Voting Agreement had not previously been terminated in
accordance with its terms, the Supporting Stockholders would deliver a written consent adopting the
Merger Agreement on July 26, 2011. The written consent was delivered on July 26, 2011, and no
further action by any other Company stockholder is required to adopt the Merger Agreement or
approve the Merger.
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which
entities present comprehensive income in their financial statements. The ASU removes the
presentation options in Accounting Standard Codification Topic 220 and requires entities to report
components of comprehensive income in either 1) a continuous statement of comprehensive income or
2) two separate but consecutive statements. The ASU, which does not change the items that must be
reported in other comprehensive income or their accounting treatment, is effective for the Company
beginning in the first quarter of 2012.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This accounting standard
update is the result of joint efforts by the FASB and IASB to develop a single converged fair value
framework that provides guidance on how to measure fair value and on what disclosures to provide
about fair value measurements. The ASUs measurement and disclosure requirements, which are
required to be applied prospectively, are effective for the Company beginning in the first quarter
of
Form10-Q
Page 8
2012 and are not expected to have a material impact on the Companys results of operations or
financial position.
In December 2010, the FASB issued 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 was effective for impairment tests performed by the
Company during 2011, and its adoption did not have an impact on the Companys 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.
Financial Assets and Liabilities
The following tables present information about our assets and liabilities measured at fair value on
a recurring basis as of July 1, 2011, December 31, 2010, and July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Impact of Netting |
|
|
July 1, 2011 |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
- |
|
|
$ |
90,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
90,000 |
|
Mutual funds |
|
$ |
- |
|
|
$ |
16,020 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
16,020 |
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
- |
|
|
$ |
586 |
|
|
$ |
- |
|
|
$ |
(441) |
|
|
$ |
145 |
|
|
Cash surrender value
of life insurance |
|
$ |
- |
|
|
$ |
8,436 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8,436 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
7,382 |
|
|
$ |
- |
|
|
$ |
(441) |
|
|
$ |
6,941 |
|
Form10-Q
Page 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
July 2, 2010 |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
$- |
|
|
|
$85,004 |
|
|
|
$- |
|
|
|
$- |
|
|
|
$85,004 |
|
Mutual funds |
|
|
$- |
|
|
|
$36,992 |
|
|
|
$- |
|
|
|
$- |
|
|
|
$36,992 |
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
$- |
|
|
|
$8,612 |
|
|
|
$- |
|
|
|
$(730) |
|
|
|
$7,882 |
|
|
Cash surrender value
of life insurance |
|
|
$- |
|
|
|
$6,779 |
|
|
|
$- |
|
|
|
$- |
|
|
|
$6,779 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
$- |
|
|
|
$821 |
|
|
|
$- |
|
|
|
$(730) |
|
|
|
$91 |
|
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 July 1, 2011, the derivative
contracts above include $94 of assets and $71 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 July 2, 2010.
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.
Form10-Q
Page 10
Nonfinancial Assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually at the end of
our second quarter and when events occur or circumstances change that would, more likely than not,
reduce the fair value of a business unit or an intangible asset with an indefinite-life below its
carrying value. Events or changes in circumstances that may trigger interim impairment reviews
include significant changes in business climate, operating results, planned investment in the
business unit or an expectation that the carrying amount may not be recoverable, among other
factors. The goodwill impairment test, performed at a reporting unit level, is a two-step test
that requires, under the first test, that we determine the fair value of a reporting unit and
compare it to the reporting units carrying value, including goodwill. We use established income
and market valuation approaches to determine the fair value of the reporting unit. For trademark
intangible assets, management uses the relief-from-royalty method in which fair value is the
discounted value of forecasted royalty revenue arising from a trademark using a royalty rate that
an independent third party would pay for use of that trademark. Further information regarding the
fair value measurements is provided below.
2011 Analysis
We completed our annual impairment test of goodwill and indefinite-lived trademarks at the end of
our second quarter. We determined that the carrying value of the howies trademark exceeded its
estimated fair value and, accordingly, recorded an impairment charge of $736. This charge is
reflected in the Europe segment. We also concluded that the fair values of the SmartWool trademark
and the reporting units to which goodwill relates substantially exceeded their respective carrying
values. Accordingly, we did not identify any impairment.
Our test of goodwill requires that we assess the fair value of the North America Wholesale and
Europe Wholesale reporting units. We determined their fair value as of July 2, 2010, by preparing
a discounted cash flow analysis using forward-looking projections of the reporting units future
operating results, as well as consideration of market valuation approaches. When completing the
step-one test on July 1, 2011, we elected to carry forward the previous determination of fair value
for our North America Wholesale and Europe Wholesale reporting units rather than reassess their
fair value. We elected to carry forward the previous determination of fair value because
we met the following requirements: (i) The most recent fair value determination exceeded the
carrying amount by a substantial margin; (ii) based on an analysis of the events that have
transpired since last years fair valuation, the likelihood was remote that the current fair value
would be less than the current carrying amount of the reporting unit; and (iii) the assets or
liabilities of the reporting units have not changed significantly since the valuation.
howies
The Company completed its annual impairment testing for the howies indefinite-lived trademark
intangible asset in the second quarter of 2011, and recorded a non-cash impairment charge of $736
in its consolidated statement of operations. Managements business plans and projections were used to develop the expected cash flows for the
next five years and a 4% residual revenue growth rate applied thereafter. The analysis reflects a
market royalty rate of 1.5% and a weighted average discount rate of 25%, derived primarily from
published sources and adjusted for increased market risk. The impairment charge reduced the howies
trademark to its estimated fair value of $540 at July 1, 2011.
2010 Analysis
During the quarter ended July 2, 2010, management concluded that the carrying value of goodwill
exceeded the estimated fair value for its IPath, North America Retail and Europe Retail reporting
units and, accordingly, recorded an impairment charge of $5,395. Management also concluded that
the carrying value of the IPath and howies trademarks and other intangible assets exceeded the
estimated fair value and, accordingly, recorded an impairment charge of $7,854. The Companys
North America Wholesale and Europe Wholesale business units had fair values substantially in excess
of their carrying value. See Note 9 to the unaudited condensed consolidated financial statements.
Form10-Q
Page 11
Impairment charges included in the second quarter of 2010 unaudited condensed consolidated
statement of operations, by segment, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
Sub- |
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
Sub- |
|
|
Total |
|
|
|
IPath |
|
|
Retail |
|
|
Total |
|
|
IPath |
|
|
howies |
|
|
Retail |
|
|
Total |
|
|
Company |
|
Goodwill |
|
$ |
4,118 |
|
|
$ |
794 |
|
|
$ |
4,912 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
483 |
|
|
$ |
483 |
|
|
$ |
5,395 |
|
Trademarks |
|
|
2,032 |
|
|
|
- |
|
|
|
2,032 |
|
|
|
1,169 |
|
|
|
3,181 |
|
|
|
- |
|
|
|
4,350 |
|
|
|
6,382 |
|
Other intangibles |
|
|
1,228 |
|
|
|
- |
|
|
|
1,228 |
|
|
|
- |
|
|
|
244 |
|
|
|
- |
|
|
|
244 |
|
|
|
1,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,378 |
|
|
$ |
794 |
|
|
$ |
8,172 |
|
|
$ |
1,169 |
|
|
$ |
3,425 |
|
|
$ |
483 |
|
|
$ |
5,077 |
|
|
$ |
13,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These non-recurring fair value measurements were developed using significant unobservable inputs
(Level 3). For goodwill, the primary valuation technique used was the discounted cash flow
analysis based on managements estimates of forecasted cash flows for each business unit, with
those cash flows discounted to present value using rates proportionate with the risks of those cash
flows. In addition, management used a market-based valuation method involving analysis of market
multiples of revenues and earnings before interest, taxes, depreciation and amortization for a
group of similar publicly traded companies and, if applicable, recent transactions involving
comparable companies. The Company believes the blended use of these models balances the inherent risk associated with either model if used on a stand-alone basis, and
this combination is indicative of the factors a market participant would consider when performing a
similar valuation. For trademark intangible assets, management used the relief-from-royalty method
in which fair value is the discounted value of forecasted royalty revenue arising from a trademark
using a royalty rate that an independent third party would pay for use of that trademark. Further
information regarding the fair value measurements is provided below.
IPath
The IPath business unit did not meet the revenue and earnings growth forecasted at its acquisition
in April 2007. Accordingly, during the second quarter of 2010, management reassessed the financial
expectations of this business as part of its long range planning process. The revenue and earnings
growth assumptions were developed based on near term trends, potential opportunities and planned
investment in the IPath® brand. Managements business plans and projections were used
to develop the expected cash flows for the next five years and a 4% residual revenue growth rate
applied thereafter. The analysis reflects a market royalty rate of 1.5% and a weighted average
discount rate of 22%, derived primarily from published sources and adjusted for increased market
risk. After the charges in the table above, there was $720 of finite-lived trademark intangible
assets remaining at July 2, 2010. The carrying value of IPaths goodwill was reduced to zero.
howies
howies had not met the revenue and earnings growth forecasted at its acquisition in December 2006.
Accordingly, during the second quarter of 2010, management reassessed the financial expectations of
this business as part of its long range planning process. The revenue and earnings growth
assumptions were developed based on near term trends, potential opportunities and planned
investment in the howies® brand. Managements business plans and projections were used
to develop the expected cash flows for the next five years and a 4% residual revenue growth rate
applied thereafter. The analysis reflects a market royalty rate of 2% and a weighted average
discount rate of 24%, derived primarily from published sources and adjusted for increased market
risk. After the charges in the table above, there was $1,200 of indefinite-lived trademark
intangible assets remaining at July 2, 2010.
North America and Europe Retail
The Companys retail businesses in North America and Europe have been negatively impacted by
continued weakness in the macroeconomic environment, low consumer spending and a longer than
expected economic recovery. The fair value of these businesses using the discounted cash flow
analysis were based on managements business plans and projections for the next five years and a 4%
residual growth thereafter. The analysis reflects a weighted average discount rate in the range of
19%, derived primarily from published sources and adjusted for increased market risk. After the
charges in the table above, the carrying value of the goodwill was zero at July 2, 2010.
Form10-Q
Page 12
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 2013. 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 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 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 July 1, 2011 and July 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 |
|
July 1, 2011 |
|
|
December 31, 2010 |
|
|
July 2, 2010 |
|
Pound Sterling |
|
|
$33,161 |
|
|
|
$23,536 |
|
|
|
$22,814 |
|
Euro |
|
|
135,140 |
|
|
|
88,414 |
|
|
|
70,080 |
|
Japanese Yen |
|
|
30,063 |
|
|
|
22,817 |
|
|
|
16,856 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$198,364 |
|
|
|
$134,767 |
|
|
|
$109,750 |
|
|
|
|
|
|
|
|
|
|
|
Latest Maturity Date |
|
January 2013 |
|
January 2012 |
|
April 2011 |
Form10-Q
Page 13
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 |
|
July 1, 2011 |
|
|
December 31, 2010 |
|
|
July 2, 2010 |
|
Pound Sterling |
|
|
$14,396 |
|
|
|
$9,312 |
|
|
|
$(18,221 |
) |
Euro |
|
|
5,798 |
|
|
|
8,913 |
|
|
|
(6,558 |
) |
Japanese Yen |
|
|
17,339 |
|
|
|
28,680 |
|
|
|
7,309 |
|
Canadian Dollar |
|
|
4,871 |
|
|
|
6,013 |
|
|
|
4,855 |
|
Norwegian Kroner |
|
|
3,657 |
|
|
|
2,219 |
|
|
|
2,711 |
|
Swedish Krona |
|
|
3,470 |
|
|
|
2,601 |
|
|
|
1,970 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$49,531 |
|
|
|
$57,738 |
|
|
|
$(7,934 |
) |
|
|
|
|
|
|
|
|
|
|
Sell Contracts |
|
|
$68,725 |
|
|
|
$71,799 |
|
|
|
$38,496 |
|
Buy Contracts |
|
|
(19,194 |
) |
|
|
(14,061 |
) |
|
|
(46,430 |
) |
|
|
|
|
|
|
|
|
|
|
Total Contracts |
|
|
$49,531 |
|
|
|
$57,738 |
|
|
|
$(7,934 |
) |
|
|
|
|
|
|
|
|
|
|
Latest Maturity Date |
|
October 2011 |
|
|
April 2011 |
|
|
October 2010 |
|
Form10-Q
Page 14
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 July 1, 2011, December 31, 2010 and July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Derivatives |
|
|
Liability Derivatives |
|
|
|
Fair Value |
|
|
Fair Value |
|
Balance Sheet Location |
|
July 1, 2011 |
|
|
December 31,
2010 |
|
|
July 2, 2010 |
|
|
July 1, 2011 |
|
|
December 31,
2010 |
|
|
July 2, 2010 |
|
|
|
|
|
|
Derivatives designated as
hedge instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8,437 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
679 |
|
Derivative liabilities |
|
|
242 |
|
|
|
1,693 |
|
|
|
45 |
|
|
|
6,962 |
|
|
|
3,284 |
|
|
|
57 |
|
Other assets, net |
|
|
164 |
|
|
|
6 |
|
|
|
- |
|
|
|
70 |
|
|
|
5 |
|
|
|
- |
|
Other long-term liabilities |
|
|
96 |
|
|
|
67 |
|
|
|
- |
|
|
|
167 |
|
|
|
178 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
502 |
|
|
$ |
1,766 |
|
|
$ |
8,482 |
|
|
$ |
7,199 |
|
|
$ |
3,467 |
|
|
$ |
736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedge instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
74 |
|
|
$ |
29 |
|
|
$ |
124 |
|
|
$ |
24 |
|
|
$ |
- |
|
|
$ |
- |
|
Derivative liabilities |
|
|
10 |
|
|
|
6 |
|
|
|
6 |
|
|
|
159 |
|
|
|
105 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
84 |
|
|
$ |
35 |
|
|
$ |
130 |
|
|
$ |
183 |
|
|
$ |
105 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
586 |
|
|
$ |
1,801 |
|
|
$ |
8,612 |
|
|
$ |
7,382 |
|
|
$ |
3,572 |
|
|
$ |
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form10-Q
Page 15
The Effect of Derivative Instruments on the Statements of Operations for the Quarters Ended
July 1, 2011 and July 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 |
|
|
$(3,319 |
) |
|
|
$2,812 |
(1) |
|
Cost of goods sold |
|
|
$(583 |
) |
|
|
$273 |
|
(1) Amount reported in the prior year of $7,358 was decreased by $4,546 in the current
year to $2,812. 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 $6,717 to the income statement within the next
twelve months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$(809 |
) |
|
|
$1,545 |
|
The Effect of Derivative Instruments on the Statements of Operations for the Six Months Ended
July 1, 2011 and July 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 |
|
|
$(8,625 |
) |
|
|
$8,412 |
(1) |
|
Cost of goods sold |
|
|
$(3,631 |
) |
|
|
$1,606 |
|
(1) Amount reported in the prior year of $7,358 was increased by $1,054 in the current
year to $8,412. 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.
Form10-Q
Page 16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$(764 |
) |
|
|
$(622 |
) |
Note 4. Share-Based Compensation
Share-based compensation costs were as follows in the quarters and six months ended July 1, 2011
and July 2, 2010, respectively:
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
July 1, 2011 |
|
July 2, 2010 |
Cost of goods sold |
|
$ |
64 |
|
|
$ |
107 |
|
Selling expense |
|
|
1,064 |
|
|
|
672 |
|
General and administrative expense |
|
|
2,254 |
|
|
|
1,310 |
|
|
|
|
|
|
|
|
Total share-based compensation |
|
$ |
3,382 |
|
|
$ |
2,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
July 1, 2011 |
|
July 2, 2010 |
Cost of goods sold |
|
$ |
122 |
|
|
$ |
188 |
|
Selling expense |
|
|
2,178 |
|
|
|
1,171 |
|
General and administrative expense |
|
|
4,693 |
|
|
|
2,288 |
|
|
|
|
|
|
|
|
Total share-based compensation |
|
$ |
6,993 |
|
|
$ |
3,647 |
|
|
|
|
|
|
|
|
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 Companys
executives and employees. On March 3, 2011, the Board of Directors also approved the 2011 LTIP
with respect to the Companys Chief Executive Officer. The 2011 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 $38.52 (the closing price
of the Companys Class A Common Stock as quoted on the New York Stock Exchange on March 3, 2011,
the date of grant). On May 26, 2011, additional awards were made under the 2011 LTIP consisting of
PSUs equal in value to one share of the Companys Class A Common Stock, and PSOs with an exercise
price of $32.51 (the closing price of the Companys Class A Common Stock as quoted on the New York
Stock Exchange on May 26, 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 Companys 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.
Form10-Q
Page 17
The maximum number of shares to be awarded with respect to PSUs under the 2011 LTIP grants is
262,748, 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 $4,299 as
of July 1, 2011. This expense is expected to be recognized over a weighted-average remaining
period of 2.7 years.
The maximum number of shares subject to exercise with respect to PSOs under the 2011 LTIP grants is
359,058, 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 $2,946 as of July 1, 2011. This expense is expected to be recognized
over a weighted-average remaining period of 3.7 years.
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
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. On May 13, 2010, additional
awards were made under the 2010 LTIP.
The maximum number of shares to be awarded with respect to PSUs under the 2010 LTIP grants is
519,800, 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 $2,523 as of July 1, 2011. This expense is expected to
be recognized over a weighted-average remaining period of 1.7 years.
Based on actual 2010 performance, the number of shares subject to exercise with respect to PSOs
under the 2010 LTIP 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 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. On May 21,
2009, additional awards were made under the 2009 LTIP.
The maximum number of shares to be awarded with respect to PSUs under the 2009 LTIP 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 $1,048 as
of July 1, 2011. This expense is expected to be recognized over a weighted-average remaining
period of 0.7 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 |
|
|
For the Quarter |
|
|
|
Ended July 1, 2011 |
|
|
Ended July 2, 2010 |
|
Expected volatility |
|
|
52.6% |
|
|
|
48.7% |
|
Risk-free interest rate |
|
|
2.1% |
|
|
|
2.5% |
|
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
Expected dividends |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
2011 LTIP |
|
|
2010 LTIP |
|
|
|
For the Six Months |
|
|
For the Six Months |
|
|
|
Ended July 1, 2011 |
|
|
Ended July 2, 2010 |
|
Expected volatility |
|
|
49.4% |
|
|
|
49.3% |
|
Risk-free interest rate |
|
|
2.4% |
|
|
|
2.8% |
|
Expected life (in years) |
|
|
6.2 |
|
|
|
6.3 |
|
Expected dividends |
|
|
- |
|
|
|
- |
|
Form10-Q
Page 18
The following summarizes activity associated with PSOs earned under the Companys 2009 and 2010
LTIP and excludes the performance-based awards noted above under the 2011 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, 2011 |
|
|
569,065 |
|
|
$ |
9.50 |
|
|
|
|
|
|
|
|
|
Settled |
|
|
491,842 |
|
|
|
19.55 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(41,436 |
) |
|
|
9.79 |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(7,948 |
) |
|
|
22.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2011 |
|
|
1,011,523 |
|
|
$ |
14.28 |
|
|
|
8.2 |
|
|
$ |
29,155 |
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
July 1, 2011 |
|
|
951,218 |
|
|
$ |
14.09 |
|
|
|
8.1 |
|
|
$ |
27,591 |
|
|
|
|
|
|
|
|
|
|
Exercisable at July 1, 2011 |
|
|
148,239 |
|
|
$ |
9.43 |
|
|
|
7.7 |
|
|
$ |
4,991 |
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to these PSOs was $2,746 as of July 1, 2011. This
expense is expected to be recognized over a weighted-average remaining period of 1.7 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 Companys Class A
Common Stock on the date of issuance. Unrecognized compensation expense related to these awards
was $1,192 as of July 1, 2011, and the expense is expected to be recognized over a weighted-average
remaining period of 1.5 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 |
|
|
For the Six Months Ended |
|
|
|
July 1, 2011 |
|
|
July 2, 2010 |
|
|
July 1, 2011 |
|
|
July 2, 2010 |
|
Expected volatility |
|
|
52.6% |
|
|
|
48.7% |
|
|
|
51.0% |
|
|
|
48.7% |
|
Risk-free interest rate |
|
|
2.1% |
|
|
|
2.5% |
|
|
|
2.1% |
|
|
|
2.5% |
|
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected dividends |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Form10-Q
Page 19
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Term |
|
Value |
Outstanding at January 1, 2011 |
|
|
3,659,924 |
|
|
$ |
25.29 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
61,806 |
|
|
|
38.47 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,358,656 |
) |
|
|
26.12 |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(29,068 |
) |
|
|
29.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2011 |
|
|
2,334,006 |
|
|
$ |
25.12 |
|
|
|
5.0 |
|
|
$ |
41,976 |
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
July 1, 2011 |
|
|
2,304,438 |
|
|
$ |
25.11 |
|
|
|
4.9 |
|
|
$ |
41,462 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 1, 2011 |
|
|
2,001,903 |
|
|
$ |
25.94 |
|
|
|
4.4 |
|
|
$ |
34,346 |
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to nonvested stock options was $2,089 as of July 1, 2011.
This expense is expected to be recognized over a weighted-average remaining period of 1.5 years.
Nonvested Shares
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 Companys restricted stock units, excluding awards under the Companys Long Term
Incentive Programs discussed above, for the quarter ended July 1, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Stock |
|
Grant Date |
|
|
Units |
|
Fair Value |
Nonvested at January 1, 2011 |
|
|
259,992 |
|
|
$ |
18.27 |
|
Awarded |
|
|
58,293 |
|
|
|
35.64 |
|
Vested |
|
|
(118,922 |
) |
|
|
17.74 |
|
Forfeited |
|
|
(5,238 |
) |
|
|
24.70 |
|
|
|
|
|
|
Nonvested at July 1, 2011 |
|
|
194,125 |
|
|
$ |
23.64 |
|
|
|
|
|
|
Expected to vest at July 1, 2011 |
|
|
178,909 |
|
|
$ |
23.43 |
|
|
|
|
|
|
Unrecognized compensation expense related to nonvested restricted stock units was $3,564 as of July
1, 2011 and the expense is expected to be recognized over a weighted-average remaining period of
1.5 years.
Note 5. Earnings/(Loss) Per Share
Basic and diluted loss per share (LPS) for the quarters ended July 1, 2011 and July 2, 2010 and
the six months ended July 1, 2011 exclude common stock equivalents and are computed by dividing net
loss by the weighted-average number of common shares outstanding for the periods presented.
Basic earnings per share (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.
Form10-Q
Page 20
The following is a reconciliation of the number of shares (in thousands) for the basic and diluted
EPS computation for the six months ended July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Weighted- Average |
|
|
Per-Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic EPS |
|
|
$2,295 |
|
|
|
53,698 |
|
|
|
$.04 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and employee
stock purchase plan shares |
|
|
|
|
|
|
323 |
|
|
|
|
|
Nonvested shares |
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
$2,295 |
|
|
|
54,184 |
|
|
|
$.04 |
|
|
|
|
|
|
|
|
|
|
|
The following securities (in thousands) were outstanding as of July 1, 2011 and July 2, 2010, but
were not included in the computation of diluted EPS/(LPS) as their inclusion would be
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
For the Six Months Ended |
|
|
July 1, 2011 |
|
July 2, 2010 |
|
July 1, 2011 |
|
July 2, 2010 |
Anti-dilutive securities |
|
|
1,214 |
|
|
|
2,967 |
|
|
|
1,336 |
|
|
|
2,491 |
|
Note 6. Comprehensive Income/(Loss)
Comprehensive income/(loss) for the quarters and six months ended July 1, 2011 and July 2, 2010 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
For the Six Months Ended |
|
|
July 1, 2011 |
|
July 2, 2010 |
|
July 1, 2011 |
|
July 2, 2010 |
Net income/(loss) |
|
$ |
(20,106) |
|
|
$ |
(23,452) |
|
|
$ |
(2,135) |
|
|
$ |
2,295 |
|
|
Change in cumulative translation adjustment |
|
|
2,390 |
|
|
|
(4,512) |
|
|
|
7,369 |
|
|
|
(11,990) |
|
Change in fair value of cash flow hedges,
net of taxes |
|
|
(2,599) |
|
|
|
2,412 |
|
|
|
(4,744) |
|
|
|
6,466 |
|
Change in other adjustments, net of taxes |
|
|
13 |
|
|
|
6 |
|
|
|
(42) |
|
|
|
(46) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income/loss |
|
$ |
(20,302) |
|
|
$ |
(25,546) |
|
|
$ |
448 |
|
|
$ |
(3,275) |
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income as of July 1, 2011, December 31,
2010 and July 2, 2010 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2011 |
|
December 31, 2010 |
|
July 2, 2010 |
Cumulative translation adjustment |
|
$ |
15,392 |
|
|
$ |
8,023 |
|
|
$ |
1,663 |
|
Fair value of cash flow hedges, net of taxes of $(333)
at July 1, 2011, $(84) at December 31, 2010 and $388
at July 2, 2010 |
|
|
(6,335) |
|
|
|
(1,591) |
|
|
|
7,370 |
|
Other adjustments, net of taxes of $61 at July 1, 2011,
$96 at December 31, 2010 and $105 at July 2, 2010 |
|
|
197 |
|
|
|
239 |
|
|
|
445 |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,254 |
|
|
$ |
6,671 |
|
|
$ |
9,478 |
|
|
|
|
|
|
|
|
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.
Form10-Q
Page 21
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.
Operating income/loss shown below for the quarter and six months ended July 1, 2011 includes an
impairment charge of $736 in Europe related to a certain intangible asset. Operating income/(loss)
shown below for the quarter and six months ended July 2, 2010 includes impairment charges of $8,172
and $5,077 in North America and Europe, respectively, related to goodwill and certain other
intangible assets. See Notes 2 and 9 to the unaudited condensed consolidated financial statements for
additional information. Operating income for North America for the quarter and six months ended July 2,
2010 also includes gains related to the termination of licensing agreements of $1,500 and $3,000,
respectively.
For the Quarter Ended July 1, 2011 and July 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Asia |
|
|
Corporate |
|
|
Consolidated |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
106,134 |
|
|
$ |
91,713 |
|
|
$ |
42,280 |
|
|
$ |
- |
|
|
$ |
240,127 |
|
Operating income/(loss) |
|
|
8,131 |
|
|
|
(6,198 |
) |
|
|
1,523 |
|
|
|
(34,368 |
) |
|
|
(30,912 |
) |
Income/(loss) before income taxes |
|
|
8,131 |
|
|
|
(6,198 |
) |
|
|
1,523 |
|
|
|
(33,201 |
) |
|
|
(29,745 |
) |
Total assets |
|
|
250,244 |
|
|
|
340,345 |
|
|
|
78,612 |
|
|
|
200,818 |
|
|
|
870,019 |
|
Goodwill |
|
|
31,964 |
|
|
|
6,994 |
|
|
|
- |
|
|
|
- |
|
|
|
38,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
91,995 |
|
|
$ |
66,750 |
|
|
$ |
30,209 |
|
|
$ |
- |
|
|
$ |
188,954 |
|
Operating income/(loss) |
|
|
2,921 |
|
|
|
(11,812 |
) |
|
|
2,630 |
|
|
|
(27,046 |
) |
|
|
(33,307 |
) |
Income/(loss) before income taxes |
|
|
2,921 |
|
|
|
(11,812 |
) |
|
|
2,630 |
|
|
|
(26,771 |
) |
|
|
(33,032 |
) |
Total assets |
|
|
211,059 |
|
|
|
323,512 |
|
|
|
49,459 |
|
|
|
182,535 |
|
|
|
766,565 |
|
Goodwill |
|
|
31,964 |
|
|
|
6,994 |
|
|
|
- |
|
|
|
- |
|
|
|
38,958 |
|
Form10-Q
Page 22
For the Six Months Ended July 1, 2011 and July 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Asia |
|
|
Corporate |
|
|
Consolidated |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
238,117 |
|
|
$ |
257,418 |
|
|
$ |
93,596 |
|
|
$ |
|
|
|
$ |
589,131 |
|
Operating income/(loss) |
|
|
29,417 |
|
|
|
22,684 |
|
|
|
9,769 |
|
|
|
(64,897 |
) |
|
|
(3,027 |
) |
Income/(loss) before income taxes |
|
|
29,417 |
|
|
|
22,684 |
|
|
|
9,769 |
|
|
|
(62,106 |
) |
|
|
(236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
213,853 |
|
|
$ |
218,380 |
|
|
$ |
73,763 |
|
|
$ |
|
|
|
$ |
505,996 |
|
Operating income/(loss) |
|
|
24,563 |
|
|
|
25,456 |
|
|
|
9,477 |
|
|
|
(53,415 |
) |
|
|
6,081 |
|
Income/(loss) before income taxes |
|
|
24,563 |
|
|
|
25,456 |
|
|
|
9,477 |
|
|
|
(53,339 |
) |
|
|
6,157 |
|
The following summarizes our revenue by product for the quarters and six months ended July 1, 2011
and July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
For the Six Months Ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Footwear |
|
$ |
168,697 |
|
|
$ |
131,589 |
|
|
$ |
416,865 |
|
|
$ |
357,150 |
|
Apparel and accessories |
|
|
66,027 |
|
|
|
52,069 |
|
|
|
160,275 |
|
|
|
137,758 |
|
Royalty and other |
|
|
5,403 |
|
|
|
5,296 |
|
|
|
11,991 |
|
|
|
11,088 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
240,127 |
|
|
$ |
188,954 |
|
|
$ |
589,131 |
|
|
$ |
505,996 |
|
|
|
|
|
|
|
|
|
|
Note 8. Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2011 |
|
December 31, 2010 |
|
July 2, 2010 |
Materials |
|
$ |
12,827 |
|
|
$ |
11,299 |
|
|
$ |
9,102 |
|
Work-in-process |
|
|
1,711 |
|
|
|
841 |
|
|
|
1,382 |
|
Finished goods |
|
|
237,182 |
|
|
|
167,928 |
|
|
|
166,722 |
|
|
|
|
|
|
|
|
Total |
|
$ |
251,720 |
|
|
$ |
180,068 |
|
|
$ |
177,206 |
|
|
|
|
|
|
|
|
Note 9. Goodwill and Intangibles
The Company completed its annual impairment testing for goodwill and indefinite-lived intangible
assets in the second quarter of 2011, and determined that the carrying value of a certain
intangible asset related to its howies® brand exceeded fair value. Accordingly, the
Company recorded a non-cash impairment charge of $736 in its consolidated statement of operations.
The impairment charge reduced the trademark of the howies® brand to its fair value of
$540 at July 1, 2011.
Form10-Q
Page 23
The Company completed its annual impairment testing for goodwill and indefinite-lived intangible
assets in the second quarter of 2010, and determined that the carrying values of certain goodwill
and intangible assets, primarily related to its IPath® and howies® brands,
exceeded fair value. Accordingly, the Company recorded non-cash impairment charges of $5,395 and
$7,854 for goodwill and intangible assets, respectively, in its consolidated statement of
operations. The impairment charge reduced the goodwill related to the IPath, North America retail,
and Europe retail reporting units to zero. The charge of $7,854 reduced the trademark and other
intangible assets of IPath and howies to their respective fair values at July 2, 2010 of $720 and
$1,200. See Note 2 to the unaudited condensed consolidated financial statements for additional
information.
A summary of goodwill activity by segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Gross |
|
|
Impairment |
|
|
Value |
|
|
Gross |
|
|
Impairment |
|
|
Value |
|
Balance at January 1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
36,876 |
|
|
$ |
(4,912 |
) |
|
$ |
31,964 |
|
|
$ |
36,876 |
|
|
$ |
- |
|
|
$ |
36,876 |
|
Europe |
|
|
7,477 |
|
|
|
(483 |
) |
|
|
6,994 |
|
|
|
7,477 |
|
|
|
- |
|
|
|
7,477 |
|
|
|
|
|
|
Total |
|
$ |
44,353 |
|
|
$ |
(5,395 |
) |
|
$ |
38,958 |
|
|
$ |
44,353 |
|
|
$ |
- |
|
|
$ |
44,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4,912 |
) |
|
$ |
(4,912 |
) |
Europe |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(483 |
) |
|
|
(483 |
) |
|
|
|
|
|
Total |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(5,395 |
) |
|
$ |
(5,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
end of quarter: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
36,876 |
|
|
$ |
(4,912 |
) |
|
$ |
31,964 |
|
|
$ |
36,876 |
|
|
$ |
(4,912 |
) |
|
$ |
31,964 |
|
Europe |
|
|
7,477 |
|
|
|
(483 |
) |
|
|
6,994 |
|
|
|
7,477 |
|
|
|
(483 |
) |
|
|
6,994 |
|
|
|
|
|
|
Total |
|
$ |
44,353 |
|
|
$ |
(5,395 |
) |
|
$ |
38,958 |
|
|
$ |
44,353 |
|
|
$ |
(5,395 |
) |
|
$ |
38,958 |
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Book |
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Gross |
|
|
Amortization |
|
|
Value |
|
|
Gross |
|
|
Amortization |
|
|
Value |
|
Trademarks
(indefinite-lived) |
|
$ |
31,710 |
|
|
$ |
- |
|
|
$ |
31,710 |
|
|
$ |
32,402 |
|
|
$ |
- |
|
|
$ |
32,402 |
|
Trademarks
(finite-lived) |
|
|
3,731 |
|
|
|
(2,292 |
) |
|
|
1,439 |
|
|
|
4,064 |
|
|
|
(2,462 |
) |
|
|
1,602 |
|
Other intangible
assets
(finite-lived) |
|
|
5,729 |
|
|
|
(5,248 |
) |
|
|
481 |
|
|
|
5,995 |
|
|
|
(5,160 |
) |
|
|
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,170 |
|
|
$ |
(7,540 |
) |
|
$ |
33,630 |
|
|
$ |
42,461 |
|
|
$ |
(7,622 |
) |
|
$ |
34,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form 10-Q
Page 24
Note 10. Credit Agreement
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 $200,000 of committed, unsecured borrowings, of
which up to $125,000 may be used for letters of credit. Any letters of credit outstanding under the Agreement ($1,595
at July 1, 2011) reduce the amount available for borrowing under the Agreement. Upon the approval of the bank group,
the Company may increase the committed borrowing limit by $100,000 for a total commitment of $300,000. 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.
Note 11. 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 Company was required to make payments to the Internal Revenue Department of
Hong Kong totaling approximately $900 in the first quarter of 2010 and $7,500 in the second 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 12. Share Repurchase
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 301,866 and 1,324,259
for the quarter and six months ended July 2, 2010, respectively. As of July 1, 2011, there were no
shares remaining 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. Shares repurchased under this authorization totaled
1,022,767 for the quarter and six months ended July 2, 2010. Shares repurchased under this
authorization totaled 1,202,101 for the quarter and six months ended July 1, 2011. As of July 1,
2011, 1,695,336 shares remained available for repurchase under this authorization.
On May 26, 2011, our Board of Directors approved the repurchase of up to an additional 5,000,000
shares of our Class A Common Stock, all of which remained available for repurchase as of July 1,
2011.
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 six months of 2010, 200,000 shares of our Class B Common Stock were converted to
an equivalent amount of our Class A Common Stock.
Note 13. Litigation
We are involved in various litigation and legal proceedings that have arisen in the ordinary course
of business and with respect to particular transactions and events as described below. Management
believes that the ultimate resolution of any such matters will not have a material adverse effect
on our unaudited condensed consolidated financial statements.
Form 10-Q
Page 25
Shareholder Litigation
Shortly after the Company entered into the Merger Agreement with V.F. Corporation, three putative
stockholder class action complaints were filed, on behalf of
Timberlands public stockholders, in the Court of Chancery of
the State of Delaware against Timberland, the members of the Timberland Board, V.F. Corporation, and V.F.
Enterprises, Inc., a wholly-owned subsidiary of V.F. Corporation. The complaints generally allege,
among other things, that the members of the Timberland Board breached their fiduciary duties owed
to Timberlands public stockholders by causing Timberland to enter into the Merger Agreement,
approving the merger, failing to take steps to ascertain and maximize the value of Timberland,
failing to conduct a public auction or other market check, and failing to provide Timberlands
public stockholders with the right to vote on whether to approve the merger, and that V.F.
Corporation and V.F. Enterprises, Inc. aided and abetted such breaches of fiduciary duties. In
addition, the complaints allege that the Merger Agreement improperly favors V.F. Corporation and unduly restricts
Timberlands ability to negotiate with other potential bidders. The complaints generally seek,
among other things, declaratory and injunctive relief concerning the alleged fiduciary breaches,
injunctive relief prohibiting defendants from consummating the merger, other forms of equitable
relief, and compensatory damages. On June 30, 2011, the three actions described above were
consolidated under the caption In re The Timberland Company Shareholder Litigation, C.A. No.
6577-CS. While this litigation is at an early stage, the Company believes that the claims are
without merit and intends to defend against the litigation vigorously.
A purported class action, City of Omaha Police and Fire Retirement System, On Behalf of Itself and
All Others Similarly Situated v. The Timberland Company and Jeffrey B. Swartz, U.S.D.C., District
of New Hampshire, was filed on June 3, 2011 on behalf of persons who purchased the common stock of
Timberland between February 17, 2011 and May 4, 2011, seeking
remedies under the Securities Exchange Act of 1934. The Complaint alleges false and misleading
statements and a scheme to defraud during the class period. While this litigation is at an early
stage, the Company believes this lawsuit is without merit and intends to defend against the
litigation vigorously.
|
|
|
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, 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 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 results and trends of the
business segments excluding the impact of exchange rate changes that are not under managements
direct control. The limitation of this measure is that it excludes exchange rate changes that
have an impact on the Companys 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,
Form 10-Q
Page 26
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 Companys 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. There have been no changes to these critical accounting policies during the six months
ended July 1, 2011. 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, 2010.
During the quarter ended July 1, 2011, management concluded that the carrying value of the howies
trademark exceeded the estimated fair value and, accordingly, recorded an impairment charge of $0.7
million. The Companys North America Wholesale and Europe Wholesale business units have fair
values substantially in excess of their carrying value. See Notes 2 and 9 to the unaudited
condensed consolidated financial statements for additional information.
During the quarter ended July 2, 2010, management concluded that the carrying value of goodwill
exceeded the estimated fair value for its IPath, North America Retail and Europe Retail reporting
units and, accordingly, recorded an impairment charge of $5.4 million. Management also concluded
that the carrying value of the IPath and howies trademarks and other intangible assets exceeded the
estimated fair value and, accordingly, recorded an impairment charge of $7.8 million. The
Companys North America Wholesale and Europe Wholesale business units have fair values
substantially in excess of their carrying value. See Notes 2 and 9 to the unaudited condensed
consolidated financial statements for additional information.
These non-recurring fair value measurements were developed using significant unobservable inputs
(Level 3). For goodwill, the primary valuation technique used was the discounted cash flow
analysis based on managements estimates of forecasted cash flows for each business unit, with
those cash flows discounted to present value using rates proportionate with the risks of
those cash flows. In addition, management used a market-based valuation method involving analysis
of market multiples of revenues and earnings before interest, taxes, depreciation and amortization
for a group of similar publicly traded companies and, if applicable, recent transactions involving
comparable companies. The Company believes the blended use of these models balances the inherent
risk associated with either model if used on a stand-alone basis, and this combination is
indicative of the factors a market participant would consider when performing a similar valuation.
When completing the analysis at July 1, 2011, we elected to carry forward the fair values
determined at July 2, 2010 for our North America Wholesale and Europe Wholesale reporting units
rather than reassess their fair value. For trademark intangible assets, management used
the relief-from-royalty method in which fair value is the discounted value of forecasted royalty
revenue arising from a trademark using a royalty rate that an independent third party would pay for
use of that trademark.
Our estimates of fair value are sensitive to changes in the assumptions used in our valuation
analyses and, as a result, actual performance in the near and longer-term could be different from
these expectations and assumptions. These differences could be caused by events such as strategic
decisions made in response to economic and competitive conditions and the impact of economic
factors on our customer base. If our future actual results are significantly lower than our
current operating results or our estimates and assumptions used to calculate fair value are
materially different, the value determined using the discounted cash flow analysis could result in
a lower value. A significant decrease in value could result in a fair value lower than carrying
value, which could result in impairment of our remaining goodwill. While we believe we have made
reasonable estimates and assumptions used to calculate the fair value of the reporting units and
other intangible assets, it is possible a material change could occur, which may ultimately result
in the recording of an additional non-cash impairment charge.
These non-cash impairment charges do not have any direct impact on our liquidity, compliance with
any covenants under our debt agreements or potential future results of operations. Our historical
operating results may not be indicative of our future operating results. We will revise our
estimates used in calculating the fair value of our reporting units as needed.
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
Form 10-Q
Page 27
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.
On June 12, 2011, the Company entered into an Agreement and Plan of Merger (the Merger Agreement)
with V.F. Corporation (VF) and VF Enterprises, Inc., a wholly owned subsidiary of VF (Merger
Sub). The Merger Agreement provides that, upon the terms and subject to the conditions set forth
in the Merger Agreement, Merger Sub will merge with and into the Company (the Merger), with the
Company continuing as the surviving corporation and a wholly owned subsidiary of VF. Holders of
the outstanding shares of the Companys common stock at the effective time of the Merger will
receive $43.00 per share in cash.
A summary of our second quarter of 2011 financial performance, compared to the second quarter of
2010, follows:
|
|
|
Second quarter revenue increased 27.1%, or 20.6% on a constant dollar basis, to $240.1
million. |
|
|
|
|
Gross margin decreased from 49.5% to 47.4%. |
|
|
|
|
Operating expenses were $144.7 million, an increase of 14.1% from $126.8 million in the
prior year period. Operating expenses for the second quarter of 2011 include impairment
charges of $0.7 million. Operating expenses for the second quarter of 2010 include
impairment charges of $13.2 million and a gain on the termination of a licensing agreement
of $1.5 million. |
|
|
|
|
We recorded an operating loss of $30.9 million in the second quarter of 2011, compared
to an operating loss of $33.3 million in the prior year period. Operating loss includes
impairment charges of $0.7 million and $13.2 million for the second quarter of 2011 and
2010, respectively. |
|
|
|
|
Net loss was $20.1 million in the second quarter of 2011, compared to $23.5 million in
the second quarter of 2010. |
|
|
|
|
Loss per share decreased from $0.44 in the second quarter of 2010 to $0.39 in the second
quarter of 2011. |
|
|
|
|
Cash at the end of the quarter was $233.8 million with no debt outstanding. |
We have undertaken 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 $1.2 million during the quarter ended July 1, 2011 related to this ERP
implementation, as well as $3.3 million in capital spending, primarily related to software
implementation and hardware.
Results of Operations for the Quarter Ended July 1, 2011 as Compared to the Quarter Ended July
2, 2010
Revenue
In the second quarter of 2011, our consolidated revenues grew 27.1% to $240.1 million, reflecting
double-digit growth across North America and each of our major markets in Europe and Asia. On a
constant dollar basis, consolidated revenues increased 20.6%.
Form 10-Q
Page 28
Products
By product group, our footwear revenues increased 28.2% to $168.7 million compared to the prior
year quarter, and apparel and accessories revenues grew 26.8% to $66.0 million. Growth in footwear
revenues was driven primarily by strong growth in mens footwear in both wholesale and retail
channels across all geographic regions, as well as benefits from foreign exchange. The improvement
in apparel and accessories revenues compared to the prior year quarter reflects revenue growth
across all regions as well, with Europe wholesale accounts and Asia retail stores driving growth in
apparel and SmartWool driving growth in accessories. Royalty and other revenue increased slightly
to $5.4 million.
In May 2011, the Company signed an agreement (the Agreement) allowing for the early expiration
and wind-down of the licensing agreement associated with the supplier of mens apparel in North
America. The Agreement calls for the licensing term to expire on December 31, 2011, but allows for
the licensee to sell licensed products to certain accounts through April 1, 2012, and to sell
certain products to the Company for delivery through May 2012 for subsequent resale in its stores.
In addition to royalties payable under the Agreement, in consideration of the early expiration of
the licensing agreement, the Company will receive a payment of approximately $6.0 million payable
between January 30, 2012 and February 29, 2012.
Channels
Wholesale revenue was $151.1 million in the second quarter of 2011, a 28.7% increase compared to
the prior year quarter, driven by double-digit growth in North America, Europe and Asia and the
benefits of foreign exchange rate changes.
Retail revenues grew 24.5% to $89.0 million in the second quarter of 2011, driven by strong
comparable store sales growth, the net addition of 16 stores and favorable foreign exchange rate
impacts.
Comparable store sales were up 14.3% compared to the second quarter of 2010, reflecting double
digit growth in North America and Asia, and strong growth in Europe. 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 240 and 224 Company-owned stores, shops and outlets worldwide at the end of the second
quarters of 2011 and 2010, respectively.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 47.4% for the second quarter of 2011, a
210 basis point decline compared to the second quarter of 2010. The decrease in gross margin
reflects higher product costs associated with leather, transportation and labor costs, partially
offset by favorable foreign exchange rate impacts. The Company expects these input costs to
continue to adversely impact gross margin through 2011, although price increases are expected to
help mitigate the impact of these costs in the second half of 2011.
Operating Expense
Operating expense for the second quarter of 2011 was $144.7 million, an increase of $17.9 million,
or 14.1%, when compared to the second quarter of 2010. The increase in operating expense was
driven by an increase in selling expense of $21.5 million and in general and administrative expense
of $7.4 million, partially offset by a decrease in impairment charges related to goodwill and
intangible assets of $12.5 million. Additionally, operating expense in the second quarter of 2010
included a $1.5 million gain related to the termination of a licensing agreement. Foreign exchange
rate changes increased operating expense by approximately $7.9 million in the second quarter of
2011.
Selling expense was $107.7 million in the second quarter of 2011, an increase of 25.0% over the
same period in 2010. Selling expense reflects planned investments in marketing and advertising and
retail expansion, as well as variable costs associated with strong revenue growth. Selling expense
as a percent of revenue was 44.8% in the second quarter of 2011 compared to 45.6% in the second
quarter of 2010.
We include the costs of physically managing inventory (warehousing and handling costs) in selling
expense. These costs totaled $8.1 million and $7.1 million in the second quarters of 2011 and
2010, respectively.
Form 10-Q
Page 29
In each of the second quarters of 2011 and 2010, we recorded $0.5 million of reimbursed shipping
expenses within revenues and the related shipping costs within selling expense. Shipping costs are
included in selling expense and were $4.1 million and $2.8 million for the quarters ended July 1,
2011 and July 2, 2010, respectively.
Advertising expense, which is included in selling expense, was $9.7 million and $5.5 million in
the second quarters of 2011 and 2010, respectively. The increase was driven by a planned
investment in out of home, Internet and digital media, television and print campaigns.
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 July 1, 2011 and July 2, 2010 was $3.3 million and
$2.2 million, respectively.
General and administrative expense for the second quarter of 2011 was $36.3 million, an increase of
25.5% compared to the $28.9 million reported in the second quarter of 2010, driven by increases in
incentive compensation and other employee related costs of $4.4 million, $1.8 million in costs
associated with the proposed acquisition of the Company by V.F. Corporation, and incremental costs
of $1.2 million related to business system transformation initiatives. General and administrative
expense as a percent of revenue was 15.1% in the second quarter of 2011 compared to 15.3% in the
second quarter of 2010.
Total operating expense in the second quarter of 2011 also included an impairment charge of $0.7
million related to an intangible asset. 2010 included an impairment charge of $7.8 million
related to certain intangible assets, an impairment charge of $5.4 million related to goodwill, and
a gain of $1.5 million associated with the termination of a licensing agreement. Approximately
$12.0 million of the total $13.2 million in impairment charges recorded in the second quarter of
2010 related to IPath and howies. See Note 2 to the unaudited condensed consolidated financial
statements.
Operating Loss
We recorded an operating loss of $30.9 million in the second quarter of 2011, compared to an
operating loss of $33.3 million in the prior year period. Operating loss included an impairment
charge of $0.7 million in the second quarter of 2011. In the second quarter of 2010, operating loss included impairment charges of $13.2 million and 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 second quarters of 2011 and 2010. Interest
expense, which is comprised of fees related to the establishment and maintenance of our revolving
credit facility and bank guarantees, and interest paid on short-term borrowings, was $0.1 million
in each of the second quarters of 2011 and 2010.
Other, net, included foreign exchange gains of $1.1 million and $1.0 million in the second quarters
of 2011 and 2010, 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 second quarters of 2011 and 2010
and should not be considered indicative of expected future results.
The effective income tax rate for the second quarter of 2011 was 32.4%. 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 second quarter of 2010 was 29.0%.
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 made required payments to the Internal Revenue
Department of Hong Kong totaling approximately $7.5 million in the second 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.
Form 10-Q
Page 30
Segments Review
We have three reportable business segments (see Note 7 to the unaudited condensed consolidated
financial statements contained herein for additional information): North America, Europe and Asia.
Revenue by segment for the quarter ended July 1, 2011 compared to the quarter ended July 2, 2010 is
as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
|
July 1, |
|
|
July 2, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
|
|
North America |
|
$ |
106.1 |
|
|
$ |
92.0 |
|
|
|
15.4 |
% |
Europe |
|
|
91.7 |
|
|
|
66.8 |
|
|
|
37.4 |
|
Asia |
|
|
42.3 |
|
|
|
30.2 |
|
|
|
40.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
240.1 |
|
|
$ |
189.0 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) by segment and as a percentage of revenue for the quarters ended July 1,
2011 and July 2, 2010 are included in the table below (dollars in millions). Segment operating
income/(loss) is presented as a percentage of its respective segment revenue. Unallocated
Corporate expenses are presented as a percentage of total revenue. Europe includes an impairment
charge of $0.7 million in the quarter ended July 1, 2011. North America and Europe include
impairment charges of $8.1 million and $5.1 million, respectively, in the quarter ended July 2,
2010. Additionally, North America includes a gain of $1.5 million related to the termination of a
licensing agreement in the quarter ended July 2, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
|
|
July 1, |
|
|
|
|
|
|
July 2, |
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
North America |
|
$ |
8.1 |
|
|
|
7.7 |
% |
|
$ |
2.9 |
|
|
|
3.2 |
% |
Europe |
|
|
(6.2 |
) |
|
|
(6.8 |
) |
|
|
(11.8 |
) |
|
|
(17.7 |
) |
Asia |
|
|
1.5 |
|
|
|
3.6 |
|
|
|
2.6 |
|
|
|
8.7 |
|
Unallocated Corporate |
|
|
(34.3 |
) |
|
|
(14.3 |
) |
|
|
(27.0 |
) |
|
|
(14.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(30.9 |
) |
|
|
(12.9 |
) |
|
$ |
(33.3 |
) |
|
|
(17.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
North America revenues were $106.1 million in the second quarter of 2011, an increase of 15.4% 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 19.3%, driven by a 20.2%
increase in comparable store sales, and a 32.0% increase in e-commerce sales. We had 67 stores at
July 1, 2011 compared to 66 stores at July 2, 2010.
Operating income for our North America segment was $8.1 million, compared to $2.9 million for the
second quarter of 2010. A 9.7% decrease in operating expenses was due primarily to a decrease in
impairment charges of $8.1 million partially offset by increased investments in marketing and
retail expansion and the impact in 2010 of a $1.5 million gain associated with the termination of a
licensing agreement. Gross profit improved slightly in the second quarter of 2011 compared to the
second
quarter of 2010, as the benefit of increased volume offset the impact of a rate decline resulting
from higher product costs and an increase in provisions for sales returns and allowances.
Europe
Europe recorded revenues of $91.7 million in the second quarter of 2011, a 37.4% increase from the
second quarter of 2010, and an increase of 24.6% on a constant dollar basis. Europe recorded
double-digit growth in the wholesale channel across
Form 10-Q
Page 31
each of its major markets, as well as strong
growth across its retail stores. Sales through both the wholesale and retail channels reflect
strong growth in mens footwear, as well as in apparel sales. Retail growth of 27.1% was driven by
comparable store sales growth of 9.4% coupled with retail expansion resulting in the net addition
of 4 stores, as well as favorable foreign exchange impacts. We had 67 stores at July 1, 2011
compared to 63 stores at July 2, 2010.
Timberlands European segment recorded an operating loss of $6.2 million in the second quarter of
2011, compared to an operating loss of $11.8 million in the second quarter of 2010. The
improvement was driven by increased gross profit resulting from volume and foreign exchange
benefits partially offset by higher product costs and unfavorable mix impacts. This improvement
was partially offset by an 18.9% increase in operating expenses, as a lower impairment charge in
2011 as compared to 2010 was more than offset by incremental marketing costs, investments in retail
expansion, higher variable costs on increased volume and an unfavorable impact from foreign
exchange rates.
Asia
In Asia, revenues increased 40.0%, or 28.1% in constant dollars, to $42.3 million in the second
quarter of 2011 driven by double-digit growth in each of our major markets, resulting in part from
the impact of new retail stores. Footwear sales drove growth in our wholesale channel, while
apparel drove the growth in our retail stores. Retail revenues were up 28.7%, reflecting strong
comparable store sales, the net addition of eleven new stores, and favorable foreign exchange rate
impacts. Comparable store sales grew 12.4%, and we added eleven new stores year over year. We had
106 stores at July 1, 2011 compared to 95 stores at July 2, 2010.
We had operating income in our Asia segment of $1.5 million for the second quarter of 2011,
compared to operating income of $2.6 million for the second quarter of 2010. These results reflect
an improvement in gross profit as the impacts of higher volume and favorable foreign exchange rates
were partially offset by higher product costs and unfavorable close-out and sales returns and
allowance trends. This improvement was more than offset by an increase in operating expense of
40.3% due to investments in retail expansion, higher variable costs on increased volume,
incremental marketing costs and an unfavorable impact from foreign exchange rates.
Corporate Unallocated
Our Unallocated Corporate expenses, which include central support and administrative costs not
allocated to our business segments, increased 27.2% to $34.3 million, which reflects higher
incentive compensation costs, legal expenses associated with the proposed acquisition of the
Company by V.F. Corporation, planned investments in brand marketing, incremental costs related to
business system transformation initiatives, and unfavorability in certain supply chain costs which
are not allocated to our reported segments.
Results of Operations for the Six Months Ended July 1, 2011 as Compared to the Six Months Ended
July 2, 2010
Revenue
In the first six months of 2011, our consolidated revenues grew 16.4% to $589.1 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 six months of 2011 compared
to the prior year period. We recorded double-digit growth in Germany, Italy, Scandinavia, France
and Spain, as well as strong growth in the UK and the Benelux region. Double-digit revenue growth
in Japan, Hong Kong, Taiwan and China in the first six months of 2011 drove the favorable year
over year improvement in Asia. On a constant dollar basis, consolidated revenues increased 12.9%.
Products
By product group, our footwear revenues increased 16.7% to $416.8 million as compared to the prior
year and apparel and accessories revenues grew 16.3% to $160.3 million. Growth in footwear
revenues was driven primarily by improved wholesale revenue in Europe and North America and
benefits from foreign exchange rates. Footwear revenue growth in North America was driven by
double-digit growth in our mens footwear and Timberland PRO® lines, partially offset by
declines in other footwear. The improvement in apparel and accessories revenues compared to the
prior year reflects
revenue growth in Asia, Europe and North America related to sales of apparel and accessories in our
own stores and in
Form 10-Q
Page 32
Europe through our wholesale partners. Royalty and other revenue increased 8.1%
to $12.0 million compared to the prior year period.
Channels
Wholesale revenue was $403.1 million in the first six months of 2011, a 15.4% increase compared to
the first six months of 2010, driven by double-digit growth across all regions and favorable
foreign exchange rate impacts. Retail revenues grew 18.8% to $186.0 million in the first six
months of 2011, driven by strong comparable store sales growth, the net addition of 16 stores and
favorable foreign exchange rate impacts.
Comparable store sales were up 10.9% compared to the first six months of 2010, with growth in both
our specialty and outlet stores across North America and Asia and our outlet stores in Europe.
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.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 47.0% for the first six months of 2011,
a 270 basis point decline compared to the first six months of 2010. Gross margin decline for the
first half of the year was driven by higher product costs associated with leather, transportation
and labor costs, partially offset by favorable foreign exchange rate impacts. The Company expects
these input costs to continue to adversely impact gross margin through 2011, although price
increases are expected to help mitigate the impact of these costs in the second half of 2011.
Operating Expense
Operating expense for the first six months of 2011 was $280.1 million, an increase of $34.7
million, or 14.2%, when compared to the first six months of 2010. The increase in operating
expense was driven by an increase in selling expense of $31.9 million and in general and
administrative expense of $12.3 million, partially offset by a decrease in impairment charges
related to goodwill and intangible assets of $12.5 million. Additionally, results for the first
six months of 2010 included a $3.0 million gain related to the termination of licensing agreements.
Foreign exchange rate changes increased operating expense by $10.1 million in the first six months
of 2011.
Selling expense was $210.7 million in the first six months of 2011, an increase of 17.9% over the
same period in 2010. Selling expense reflects planned investments in marketing, advertising and
retail expansion, variable costs associated with strong revenue growth and higher compensation
costs. Selling expense as a percent of revenue was 35.8% in the first six months of 2011 compared
to 35.3% in the first six months of 2010.
We include the costs of physically managing inventory (warehousing and handling costs) in selling
expense. These costs totaled $17.1 million and $15.4 million in the first six months of 2011 and
2010, respectively.
In the first six months of 2011 and 2010, we recorded $1.2 million and $1.1 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 $9.5 million and $8.0 million for
the six months ended July 1, 2011 and July 2, 2010, respectively.
Advertising expense, which is included in selling expense, was $14.8 million and $9.3 million in
the first six months of 2011 and 2010, respectively. The increase was driven by a planned
investment in out of home, Internet and digital media, television and print campaigns.
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.
General and administrative expense for the first six months of 2011 was $68.7 million, an increase
of 21.9% compared to the $56.3 million reported in the first six months of 2010, driven by
increases in incentive compensation and other employee related costs of $8.7 million, incremental
costs of $2.2 million related to business system transformation initiatives and $1.8 million in
costs associated with the proposed acquisition of the Company by V.F. Corporation. General and
administrative expense as a percent of revenue was 11.7% in the first six months of 2011 compared
to 11.1% in the first six months of 2010.
Form 10-Q
Page 33
Total operating expense in the first six months of 2011 also includes an impairment charge of $0.7
million related to an intangible asset. Total operating expense in the first six months of 2010
includes an impairment charge of $7.8 million related to certain intangible assets, an impairment
charge of $5.4 million related to goodwill, and a gain of
$3.0 million associated with the termination of licensing agreements.
Operating Income/(Loss)
We recorded an operating loss of $3.0 million in the first six months of 2011, compared to
operating income of $6.1 million in the prior year period as an increase in gross profit on higher
volume was offset by increased operating expense resulting primarily from higher variable selling
costs, and investments in marketing and retail expansion. Operating loss in the first six months
of 2011 includes an impairment charge of $0.7 million related to an intangible asset. Operating
income in the first six months of 2010 included a goodwill and intangible asset impairment charge
of $13.2 million and gains on termination of licensing agreements of $3.0 million.
Other Income/(Expense) and Taxes
Interest income was $0.3 million and $0.2 million in the first six months of 2011 and 2010,
respectively. Interest expense, which is comprised of fees related to the establishment and
maintenance of our revolving credit facility and bank guarantees, and interest paid on short-term
borrowings, was $0.3 million in each of the first six months of 2011 and 2010.
Other, net, included foreign exchange gains of $2.7 million and $0.5 million in the first six
months of 2011 and 2010, 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 six months of 2011
and 2010 and should not be considered indicative of expected future results.
During the first six months 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%. This rate may
vary if actual results differ from our current estimates, or there are changes in our liability for
uncertain tax positions. The effective income tax rate for the first six months of 2010 was 62.7%.
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 made required payments to the Internal Revenue
Department of Hong Kong totaling approximately $8.4 million in the first six months 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.
Form 10-Q
Page 34
Segments Review
Revenue by segment for the six months ended July 1, 2011 compared to the six months ended July 2,
2010 is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
July 1, |
|
|
July 2, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
|
|
|
|
|
|
North America |
|
$ |
238.1 |
|
|
$ |
213.9 |
|
|
|
11.3 |
% |
Europe |
|
|
257.4 |
|
|
|
218.4 |
|
|
|
17.9 |
|
Asia |
|
|
93.6 |
|
|
|
73.7 |
|
|
|
26.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
589.1 |
|
|
$ |
506.0 |
|
|
|
16.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) by segment and as a percentage of revenue for the six months ended July 1,
2011 and July 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. North America includes impairment charges
of $8.1 million and a gain related to the termination of licensing agreements of $3.0 million in
the six months ended July 2, 2010. Europe includes impairment charges of $0.7 million and $5.1
million in the six months ended July 1, 2011 and July 2, 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
July 2, |
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
29.4 |
|
|
|
12.4 |
% |
|
$ |
24.6 |
|
|
|
11.5 |
% |
Europe |
|
|
22.7 |
|
|
|
8.8 |
|
|
|
25.4 |
|
|
|
11.7 |
|
Asia |
|
|
9.8 |
|
|
|
10.4 |
|
|
|
9.5 |
|
|
|
12.8 |
|
Unallocated Corporate |
|
|
(64.9 |
) |
|
|
(11.0 |
) |
|
|
(53.4 |
) |
|
|
(10.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3.0 |
) |
|
|
(0.5 |
) |
|
$ |
6.1 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
North America revenues were $238.1 million in the first six months of 2011, an increase of 11.3% as
compared to the same period in 2010. We recorded double-digit growth from our
Timberland® mens and womens footwear and Timberland PRO® footwear lines, as
well as solid growth from SmartWool® accessories. Within North America, our retail
business grew 13.3%, driven by comparable store sales growth in our outlet stores and a 38.4%
increase in our e-commerce business.
Operating income for our North America segment was $29.4 million, compared to $24.6 million for the
first six months of 2010. Gross profit improved by 3.6% as the benefits of higher volume and
favorable mix were partially offset by a gross margin rate decline driven by increased product
costs and higher provisions for sales returns and allowances. Operating expenses decreased 1.8% as
increased investments in marketing, retail expansion, higher volume related costs and the impact in
2010 of a $3.0 million gain associated with the termination of a licensing agreement were offset by
the absence of goodwill and intangible asset impairment charges in 2011 as compared to 2010.
Europe
Europe recorded revenues of $257.4 million in the first six months of 2011, a 17.9% increase from
the first six months of 2010, and an increase of 13.3% on a constant dollar basis. Europe recorded
strong growth across its major markets, in particular Germany, Italy, Scandinavia and France, as
well as its distributor markets. Both wholesale and retail channels showed double-digit growth in
mens and womens footwear as well as in apparel and accessories. Retail growth of 16.9% was
driven by comparable store sales growth of 5.1%, the net addition of 4 stores and favorable foreign
exchange rate impacts.
Timberlands European segment recorded operating income of $22.7 million in the first six months of
2011, compared to operating income of $25.4 million in the first six months of 2010, as a 9.0%
increase in gross profit was offset by a 14.8% increase in operating expenses. Gross profit
improvement was driven by volume and favorable foreign exchange impacts, partially offset by a
gross margin decline resulting from higher product costs and unfavorable mix impacts. Operating
expense increases were the result of the impact of foreign exchange rate changes, higher
advertising spending, retail expansion, and higher variable selling costs on increased volume,
partially offset by a decrease in impairment charges.
Asia
In Asia, revenues increased 26.9%, or 17.4% in constant dollars, to $93.6 million in the first six
months of 2011 due to double-digit growth in both wholesale and retail channels and favorable
foreign exchange rate impacts. Mens footwear, along with a strong apparel product offering, drove
growth in both channels. Retail revenues were up 29.4%, driven by
Form 10-Q
Page 35
comparable store sales growth of
13.8%, the addition of 11 stores, and favorable foreign exchange rate impacts.
We had operating income in our Asia segment of $9.8 million for the first six months of 2011,
compared to operating income of $9.5 million for the first six months of 2010, as an improvement in
gross profit was partially offset by an increase of 32.6% in operating expenses. Gross profit
improvement was driven by volume and favorable foreign exchange impacts, partially offset by higher
product costs. Operating expense rose as the result of higher selling related costs on increased
volume, retail expansion, rent costs, and increased marketing spending.
Corporate Unallocated
Our Unallocated Corporate expenses, which include central support and administrative costs not
allocated to our business segments, increased 21.5% to $64.9 million in the first six months of
2011, which reflects higher incentive compensation costs, incremental costs related to business
system transformation initiatives, legal expenses associated with the proposed acquisition of the
Company by V.F. Corporation, planned investments in brand marketing, and favorability in certain
supply chain costs which are not allocated to our reported segments.
Reconciliation of Total Company, Europe and Asia Revenue Changes To Constant Dollar
Revenue Changes
Total Company Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
|
For the Six Months |
|
|
|
Ended July 1, 2011 |
|
|
Ended July 1, 2011 |
|
|
$ Millions Change |
|
% Change |
|
$ Millions Change |
|
% Change |
Revenue increase (GAAP) |
|
$ |
51.2 |
|
|
|
27.1 |
% |
|
$ |
83.1 |
|
|
|
16.4 |
% |
Increase due to foreign exchange rate changes |
|
|
12.4 |
|
|
|
6.5 |
% |
|
|
17.5 |
|
|
|
3.5 |
% |
|
|
|
|
|
Revenue increase in constant dollars |
|
$ |
38.8 |
|
|
|
20.6 |
% |
|
$ |
65.6 |
|
|
|
12.9 |
% |
Europe Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
|
For the Six Months |
|
|
|
Ended July 1, 2011 |
|
|
Ended July 1, 2011 |
|
|
$ Millions Change |
|
% Change |
|
$ Millions Change |
|
% Change |
Revenue increase (GAAP) |
|
$ |
25.0 |
|
|
|
37.4 |
% |
|
$ |
39.0 |
|
|
|
17.9 |
% |
Increase due to foreign exchange rate changes |
|
|
8.5 |
|
|
|
12.8 |
% |
|
|
9.9 |
|
|
|
4.6 |
% |
|
|
|
|
|
Revenue increase in constant dollars |
|
$ |
16.5 |
|
|
|
24.6 |
% |
|
$ |
29.1 |
|
|
|
13.3 |
% |
Asia Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
|
For the Six Months |
|
|
|
Ended July 1, 2011 |
|
|
Ended July 1, 2011 |
|
|
|
$ Millions Change |
|
% Change |
|
$ Millions Change |
|
% Change |
Revenue increase (GAAP) |
|
$ |
12.1 |
|
|
|
40.0 |
% |
|
$ |
19.8 |
|
|
|
26.9 |
% |
Increase due to foreign exchange rate changes |
|
|
3.6 |
|
|
|
11.9 |
% |
|
|
7.0 |
|
|
|
9.5 |
% |
|
|
|
|
|
Revenue increase in constant dollars |
|
$ |
8.5 |
|
|
|
28.1 |
% |
|
$ |
12.8 |
|
|
|
17.4 |
% |
Form 10-Q
Page 36
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 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 results and trends of the business segments excluding the impact of
exchange rate changes that are not under managements 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 $116.7 million at July 1, 2011, compared with $188.3 million as of
December 31, 2010 and $86.8 million as of July 2, 2010. Days sales outstanding were 43 days as of
July 1, 2011, compared with 35 days as of December 31, 2010 and 41 days as of July 2, 2010.
Wholesale days sales outstanding were 58 days for the second quarter of 2011, 44 days at December
31, 2010 and 55 days for the second quarter of 2010. The increase in days sales outstanding is
primarily attributable to the timing of sales within the quarter.
Inventory was $251.7 million as of July 1, 2011, compared with $180.1 million at December 31, 2010
and $177.2 million as of
July 2, 2010. The increase of 42.0% is the result of expected growth for the business in 2011,
increased product costs, and the purchase of product in advance of potential factory capacity
constraints.
Liquidity and Capital Resources
Net cash used by operations for the first half of 2011 was $20.2 million, compared with cash
provided by operations of $1.0 million for the first half of 2010, reflecting a net loss for the
first six months of 2011 and an increased investment in operating assets and liabilities. Overall,
in 2011 we invested $44.2 million in operating assets and liabilities compared to an investment of
$27.7 million in the first six months of 2010, reflecting higher inventory investment and related
accounts payable to support our expected growth.
Net cash used for investing activities was $19.7 million in the first half of 2011, compared with
$7.4 million in the first half of 2010. Capital spending totaled $19.2 million in the first half
of 2011 compared to $7.3 million in the first half 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 used by financing activities was $0.5 million in the first half of 2011, compared with
$41.8 million in the first half of 2010. Cash flows used for financing activities reflect share
repurchases of $40.9 million in the first six months of 2011, compared with $44.2 million in the
first six months of 2010. We received cash inflows of $36.5 million in the first half of 2011 from
the exercise of employee stock options, compared with $2.4 million from such exercises in the first
half 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 are executed with a
group of major financial institutions and have varying maturities through January 2013. 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
Form 10-Q
Page 37
expected to significantly affect our ability to meet
our liquidity needs.
On April 26, 2011, we entered into an amended and restated unsecured revolving credit facility with
a group of banks which matures on April 26, 2016 (the 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 ($1.6 million at July 1, 2011)
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.
This facility may be used for working capital, share repurchases, acquisitions and other general
corporate purposes. Under the terms of the Agreement, we may borrow at interest rates based on
Eurodollar rates (approximately 0.2% at July 1, 2011), plus an applicable margin based on a
fixed-charge coverage grid of between 87.5 and 175 basis points that is adjusted quarterly. As of
July 1, 2011, the applicable margin under the facility was 127.5 basis points. We 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. As of July 1, 2011, the commitment fee was
22.5 basis points. 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. The Agreement also contains certain
customary affirmative and negative covenants. 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, and were in compliance for the quarter ended July 1, 2011.
We have uncommitted lines of credit available from certain banks which totaled $30 million at July
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 July 1, 2011 and July 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 Companys
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.
Off-Balance Sheet Arrangements
Letters of Credit
As of July 1, 2011, December 31, 2010 and July 2, 2010, we had letters of credit outstanding of
$22.5 million, $16.5 million and $15.9 million, respectively. These letters of credit were issued
principally in support of real estate commitments.
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.
Form 10-Q
Page 38
|
|
|
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 July 1, 2011 and July 2, 2010, 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 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 18 months or less. Based upon a sensitivity analysis as of July
1, 2011, a 10% change in foreign exchange rates would cause the fair value of our derivative
instruments to increase/decrease by approximately $25.5 million, compared to an increase/decrease
of $19.4 million at December 31, 2010 and an increase/decrease of $9.4 million at July 2, 2010.
|
|
|
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 July 1, 2011
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Part II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
On June 12, 2011, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with V.F. Corporation (VF) and VF Enterprises, Inc., a wholly owned subsidiary of VF
(Merger Sub). The Merger Agreement provides that, upon the terms and subject to the conditions
set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the Merger),
with the Company continuing as the surviving corporation and a wholly owned subsidiary of VF.
Form10-Q
Page 39
Shortly after the Company entered into the Merger Agreement with VF, three
putative stockholder class action complaints were filed, on behalf of Timberlands public
stockholders, in the Court of Chancery of the State of Delaware against Timberland, the members of the
Timberland Board, VF, and Merger Sub. The
complaints generally allege, among other things, that the members of the Timberland Board breached
their fiduciary duties owed to Timberlands public stockholders by causing Timberland to enter into
the Merger Agreement, approving the merger, failing to take steps to ascertain and maximize the
value of Timberland, failing to conduct a public auction or other market check, and failing to
provide Timberlands public stockholders with the right to vote on whether to approve the merger,
and that VF and Merger Sub aided and abetted such breaches of fiduciary
duties. In addition, the complaints allege that the Merger Agreement improperly favors VF and
unduly restricts Timberlands ability to negotiate with other potential bidders. The complaints
generally seek, among other things, declaratory and injunctive relief concerning the alleged
fiduciary breaches, injunctive relief prohibiting defendants from consummating the merger, other
forms of equitable relief, and compensatory damages. On June 30, 2011, the three actions described
above were consolidated under the caption In re The Timberland Company Shareholder Litigation, C.A.
No. 6577-CS. While this litigation is at an early stage, the Company believes that the claims are
without merit and intends to defend against the litigation vigorously.
A purported class action, City of Omaha Police and Fire Retirement System, On Behalf of Itself and
All Others Similarly Situated v. The Timberland Company and Jeffrey B. Swartz, U.S.D.C., District
of New Hampshire, was filed on June 3, 2011 on behalf of persons who purchased the common stock of
Timberland between February 17, 2011 and May 4, 2011, seeking remedies under the Securities
Exchange Act of 1934. The Complaint alleges false and misleading statements and a scheme to
defraud during the class period. While this litigation is at an early stage, the Company believes
this lawsuit is without merit and intends to defend against the litigation vigorously.
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 Risk Factors in Part I,
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, and 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.
The risk factor described below is in addition to those risk factors referenced above:
Our business could be adversely impacted as a result of uncertainty related to the proposed Merger
with V.F. Corporation and significant costs, expenses and fees.
The proposed Merger could cause disruptions to our business or business relationships, which could
have an adverse impact on our financial condition, results of operations and cash flows. For
example:
the occurrence of any event, change or other circumstances that could give rise to the termination
of the Merger Agreement, including a termination under circumstances that could require us to pay
the Termination Fee;
the failure to obtain, delays in obtaining or adverse conditions contained in any required
regulatory or other approvals in connection with the Merger;
the failure to close or delay in consummating the Merger for any other reason;
risks that the proposed Merger disrupts current plans and operations and the potential
difficulties in employee retention as a result of the Merger;
the outcome of any legal proceedings that have been or may be instituted against Timberland and/or
others relating to the Merger Agreement, including the litigation disclosed above under Part II -
Item 1, Legal Proceedings;
the diversion of our managements attention from our ongoing business concerns;
the effect of the announcement, pendency, termination or anticipated consummation of the Merger on
our stock price, business relationships, operating results and business generally; and
the amount of the costs, fees, expenses and charges related to the Merger.
Form10-Q
Page 40
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES(1)
For the Three Fiscal Months Ended July 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
April 2 April 29 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
2,897,437 |
|
April 30 May 27 (a) |
|
|
1,202,101 |
|
|
|
33.30 |
|
|
|
1,202,101 |
|
|
|
6,695,336 |
|
May 28 July 1 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,695,336 |
|
|
|
|
|
|
|
|
|
|
|
|
Q2 Total |
|
|
1,202,101 |
|
|
$ |
33.30 |
|
|
|
1,202,101 |
|
|
|
|
|
Footnote (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved |
|
|
|
|
|
Announcement |
|
Program |
|
Expiration |
|
|
Date |
|
Size (Shares) |
|
Date |
|
Program 1 |
|
|
12/09/2009 |
|
|
|
6,000,000 |
|
|
None |
Program 2 (a) |
|
|
06/01/2011 |
|
|
|
5,000,000 |
|
|
None |
No existing programs expired or were terminated during the period. See Note 12 to our unaudited
condensed consolidated financial statements in this Form 10-Q for additional information.
|
|
|
* |
|
Fiscal month |
|
** |
|
Based on trade date not settlement date |
Form10-Q
Page 41
Item 6. EXHIBITS
|
|
|
|
|
|
|
Exhibit 10.1
|
|
Third Amended and Restated Revolving Credit Agreement dated as of April
26, 2011 among The Timberland Company, certain lenders listed therein and Bank of America,
N.A. as a lender and as administrative agent, 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. |
|
|
|
|
|
|
|
Exhibit 101.INS
|
|
XBRL Instance Document |
|
|
|
|
|
|
|
Exhibit 101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
Exhibit 101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
Exhibit 101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
Exhibit 101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
Exhibit 101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
Form10-Q
Page 42
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)
|
|
Date: August 4, 2011 |
By: |
/s/ JEFFREY B. SWARTZ
|
|
|
|
Jeffrey B. Swartz |
|
|
|
Chief Executive Officer |
|
|
|
|
|
Date: August 4, 2011 |
By: |
/s/ CARRIE W. TEFFNER
|
|
|
|
Carrie W. Teffner |
|
|
|
Chief Financial Officer |
|
Form10-Q
Page 43
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
|
Exhibit 10.1
|
|
Third Amended and Restated Revolving Credit Agreement
dated as of April 26, 2011 among The Timberland
Company, certain lenders listed therein and Bank of
America, N.A. as a lender and as administrative
agent, 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. |
|
|
|
Exhibit 101.INS
|
|
XBRL Instance Document |
|
|
|
Exhibit 101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
Exhibit 101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
Exhibit 101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
Exhibit 101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
Exhibit 101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |