e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended June 30, 2006
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-9548
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
Delaware
|
|
02-0312554 |
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
200 Domain Drive, Stratham, New Hampshire
|
|
03885 |
|
(Address of Principal Executive Offices)
|
|
(Zip Code) |
Registrants Telephone Number, Including Area Code: (603) 772-9500
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
On July 28, 2006, 51,499,584 shares of the registrants Class A Common Stock were outstanding and
11,743,660 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
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
July 1, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
108,065 |
|
|
$ |
189,831 |
|
|
$ |
213,163 |
|
Accounts receivable, net of allowance for doubtful accounts of $9,870 at
June 30, 2006, $7,777 at July 1, 2005 and $8,755 at December 31, 2005 |
|
|
125,719 |
|
|
|
130,638 |
|
|
|
168,831 |
|
Inventory, net |
|
|
210,963 |
|
|
|
216,483 |
|
|
|
167,132 |
|
Prepaid expense |
|
|
46,128 |
|
|
|
29,075 |
|
|
|
33,502 |
|
Deferred income taxes |
|
|
16,964 |
|
|
|
14,545 |
|
|
|
26,934 |
|
Derivative assets |
|
|
186 |
|
|
|
6,360 |
|
|
|
6,044 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
508,025 |
|
|
|
586,932 |
|
|
|
615,606 |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
83,225 |
|
|
|
76,718 |
|
|
|
82,372 |
|
Deferred income taxes |
|
|
1,252 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
39,533 |
|
|
|
14,163 |
|
|
|
39,503 |
|
Intangible assets, net |
|
|
41,570 |
|
|
|
5,122 |
|
|
|
40,909 |
|
Other assets, net |
|
|
11,926 |
|
|
|
10,061 |
|
|
|
10,264 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
685,531 |
|
|
$ |
692,996 |
|
|
$ |
788,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
92,286 |
|
|
$ |
89,242 |
|
|
$ |
97,294 |
|
Accrued expense |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related |
|
|
23,631 |
|
|
|
27,339 |
|
|
|
48,721 |
|
Other |
|
|
50,820 |
|
|
|
45,523 |
|
|
|
53,121 |
|
Income taxes payable |
|
|
156 |
|
|
|
8,158 |
|
|
|
44,210 |
|
Derivative liabilities |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
171,893 |
|
|
|
170,262 |
|
|
|
243,346 |
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation and other long-term liabilities |
|
|
13,400 |
|
|
|
14,394 |
|
|
|
16,046 |
|
Deferred income taxes |
|
|
|
|
|
|
5,814 |
|
|
|
1,075 |
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $.01 par value; 2,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock, $.01 par value (1 vote per share); 120,000,000
shares authorized; 72,413,990 shares issued at June 30, 2006, 71,427,238
shares issued at July 1, 2005 and 71,804,959 shares issued at December
31, 2005 |
|
|
724 |
|
|
|
714 |
|
|
|
718 |
|
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; 11,743,660 shares issued and outstanding at June 30, 2006,
July 1, 2005 and December 31, 2005 |
|
|
117 |
|
|
|
117 |
|
|
|
117 |
|
Additional paid-in capital |
|
|
213,187 |
|
|
|
215,878 |
|
|
|
214,483 |
|
Deferred compensation |
|
|
|
|
|
|
(34,307 |
) |
|
|
(27,166 |
) |
Retained earnings |
|
|
755,218 |
|
|
|
622,973 |
|
|
|
739,004 |
|
Accumulated other comprehensive income |
|
|
6,744 |
|
|
|
12,080 |
|
|
|
8,696 |
|
Treasury Stock at cost; 21,052,985 Class A shares at June 30, 2006,
16,308,732 Class A shares at July 1, 2005 and 18,921,290 Class A shares
at December 31, 2005 |
|
|
(475,752 |
) |
|
|
(314,929 |
) |
|
|
(407,665 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
500,238 |
|
|
|
502,526 |
|
|
|
528,187 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
685,531 |
|
|
$ |
692,996 |
|
|
$ |
788,654 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 4
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
226,605 |
|
|
$ |
240,269 |
|
|
$ |
576,416 |
|
|
$ |
594,480 |
|
Cost of goods sold |
|
|
123,784 |
|
|
|
122,289 |
|
|
|
297,492 |
|
|
|
289,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
102,821 |
|
|
|
117,980 |
|
|
|
278,924 |
|
|
|
305,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
95,614 |
|
|
|
85,238 |
|
|
|
200,354 |
|
|
|
185,977 |
|
General and administrative |
|
|
27,639 |
|
|
|
24,340 |
|
|
|
56,268 |
|
|
|
48,842 |
|
Restructuring costs |
|
|
431 |
|
|
|
|
|
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
123,684 |
|
|
|
109,578 |
|
|
|
257,534 |
|
|
|
234,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
(20,863 |
) |
|
|
8,402 |
|
|
|
21,390 |
|
|
|
70,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
666 |
|
|
|
1,063 |
|
|
|
1,771 |
|
|
|
2,164 |
|
Other, net |
|
|
392 |
|
|
|
148 |
|
|
|
1,593 |
|
|
|
1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
1,058 |
|
|
|
1,211 |
|
|
|
3,364 |
|
|
|
3,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before provision/(benefit) for income taxes |
|
|
(19,805 |
) |
|
|
9,613 |
|
|
|
24,754 |
|
|
|
73,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(benefit) for income taxes |
|
|
(6,833 |
) |
|
|
3,268 |
|
|
|
8,540 |
|
|
|
25,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
(12,972 |
) |
|
$ |
6,345 |
|
|
$ |
16,214 |
|
|
$ |
48,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(.21 |
) |
|
$ |
.09 |
|
|
$ |
.26 |
|
|
$ |
.72 |
|
Diluted |
|
$ |
(.21 |
) |
|
$ |
.09 |
|
|
$ |
.25 |
|
|
$ |
.71 |
|
Weighted-average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
63,035 |
|
|
|
66,913 |
|
|
|
63,308 |
|
|
|
67,250 |
|
Diluted |
|
|
63,035 |
|
|
|
68,376 |
|
|
|
64,566 |
|
|
|
68,698 |
|
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 CASH FLOWS
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
July 1, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,214 |
|
|
$ |
48,592 |
|
Adjustments to reconcile net income to net cash used by operating activities: |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
9,185 |
|
|
|
6,265 |
|
Share-based compensation |
|
|
10,967 |
|
|
|
1,323 |
|
Depreciation and other amortization |
|
|
13,309 |
|
|
|
12,451 |
|
Tax benefit from share-based compensation, net of excess benefit |
|
|
1,494 |
|
|
|
4,880 |
|
Other non-cash charges and credits, net |
|
|
(2,269 |
) |
|
|
1,241 |
|
Increase/(decrease) in cash from changes in working capital: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
47,979 |
|
|
|
17,110 |
|
Inventory |
|
|
(42,415 |
) |
|
|
(89,945 |
) |
Prepaid expense |
|
|
(11,328 |
) |
|
|
(2,993 |
) |
Accounts payable |
|
|
(6,136 |
) |
|
|
38,809 |
|
Accrued expense |
|
|
(27,749 |
) |
|
|
(48,649 |
) |
Income taxes payable |
|
|
(44,861 |
) |
|
|
(26,602 |
) |
|
|
|
|
|
|
|
Net cash used by operating activities |
|
|
(35,610 |
) |
|
|
(37,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(12,613 |
) |
|
|
(9,528 |
) |
Other |
|
|
(3,685 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(16,298 |
) |
|
|
(9,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Common stock repurchases |
|
|
(69,919 |
) |
|
|
(80,349 |
) |
Issuance of common stock |
|
|
12,128 |
|
|
|
13,546 |
|
Excess tax benefit from share-based compensation |
|
|
2,305 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(55,486 |
) |
|
|
(66,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents |
|
|
2,296 |
|
|
|
(4,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and equivalents |
|
|
(105,098 |
) |
|
|
(119,285 |
) |
Cash and equivalents at beginning of period |
|
|
213,163 |
|
|
|
309,116 |
|
|
|
|
|
|
|
|
Cash and equivalents at end of period |
|
$ |
108,065 |
|
|
$ |
189,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
258 |
|
|
$ |
205 |
|
Income taxes paid |
|
$ |
40,597 |
|
|
$ |
39,980 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Form 10-Q
Page 6
THE TIMBERLAND COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
Note 1. Summary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain the adjustments necessary to present fairly The Timberland Companys (we,
our, us, Timberland or the Company) financial position, results of operations and changes
in cash flows for the interim periods presented. Such adjustments consist of normal recurring
items. The unaudited condensed consolidated financial statements should be read in conjunction
with our consolidated financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2005.
Our revenue consists of sales to wholesale customers, retail store revenues, license fees and
royalties. We record wholesale revenues when title passes and the risks and rewards of ownership
have passed to the customer, based on the terms of sale. Title passes generally upon shipment or
upon receipt by the customer, depending on the country of sale and the agreement with the customer.
Retail store revenues are recorded at the time of the sale. License fees and royalties are
recognized as earned per the terms of our licensing agreements.
In the second quarter and the first six months of 2006, we recorded $642 and $1,667 of reimbursed
shipping expenses within revenues and the related shipping costs within selling expense,
respectively. In the second quarter and the first six months of 2005, we recorded $733 and $1,928
of reimbursed shipping expenses within revenues and the related shipping costs within selling
expense, respectively. Shipping costs are included in selling expense and were $3,441 and $4,529
for the second quarters of 2006 and 2005, and $8,064 and $9,011 for the first six months of 2006
and 2005, respectively.
We maintain allowances for doubtful accounts for estimated losses resulting from the potential
inability of our customers to make required payments. We estimate potential losses primarily based
on our historical rate of credit losses and our knowledge of the financial condition of our
customers. We also make other estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses as described in the Critical Accounting Policies discussion in
Part I Item 2 of this report.
Note 2. Historical Financial Results
The results of operations for the three and six months ended June 30, 2006 are not necessarily
indicative of the results to be expected for the full year. Historically, our revenue has been
more heavily weighted to the second half of the year.
Note 3. Share-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS)
123(R), Share-Based Payment, which requires a company to measure the grant date fair value of
equity awards given to employees in exchange for services and recognize that cost over the period
that such services are performed. This Standard is a revision of SFAS 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, and its related implementation guidance. The Company
adopted the provisions of SFAS 123(R) using the modified prospective application method. Under
this transition method, compensation expense is recognized on all share-based awards granted prior
to, but not yet vested as of adoption based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123. The Company recognizes the cost of share-based awards on
a straight-line basis over the awards requisite service period (generally the vesting period of
the award), with the exception of certain stock options for officers, directors and key employees
granted prior to, but not yet vested as of adoption, for which expense continues to be recognized
on a graded schedule over the vesting period of the award. Share-based compensation costs, which
are recorded in cost of goods sold and selling and general and administrative expenses, totaled
$5,712 ($3,741 net of taxes) and $10,967 ($7,183 net of taxes) for the three and six months ended
June 30, 2006, respectively.
As a result of adopting SFAS 123(R), the Companys income/(loss) before provision/(benefit) for
income taxes for the three and six months ended June 30, 2006 are $2,616 and $5,530 lower,
respectively, and the Companys net income/(loss) for the three and six months ended June 30, 2006
are $1,713 and $3,622 lower, respectively, than if we had continued to account for
Form 10-Q
Page 7
share-based compensation under APB Opinion 25. Had the Company not adopted SFAS 123(R), basic
and diluted earnings/(loss) per share for the three and six months ended June 30, 2006 would have
been:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, 2006 |
|
June 30, 2006 |
Basic earnings/(loss) per share, as reported |
|
|
(.21 |
) |
|
|
.26 |
|
Pro forma basic earnings/(loss) per share |
|
|
(.18 |
) |
|
|
.31 |
|
Diluted earnings/(loss) per share, as reported |
|
|
(.21 |
) |
|
|
.25 |
|
Pro forma diluted earnings/(loss) per share |
|
|
(.18 |
) |
|
|
.31 |
|
Prior to January 1, 2006, the Company applied the intrinsic value method in APB Opinion 25 and
related interpretations in accounting for our stock plans, SFAS 123, and SFAS 148, Accounting for
Stock-Based Compensation-Transitional and Disclosure-An Amendment of FASB Statement No. 123, for
disclosure purposes. In our unaudited condensed consolidated statements of operations for the
three and six months ended July 1, 2005, no compensation expense was recognized for stock option
grants; however, the Company recognized compensation expense for nonvested share awards of $662
($437 net of taxes) and $1,323 ($873 net of taxes), respectively. The following table illustrates
the effects on net income and earnings per share had compensation expense for stock option grants
issued been determined under the fair value method of SFAS 123 for the three and six months ended
July 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
July 1, 2005 |
|
July 1, 2005 |
Net income as reported |
|
$ |
6,345 |
|
|
$ |
48,592 |
|
Add: Share-based employee
compensation expense included in
reported net income, net of related
tax effect |
|
|
437 |
|
|
|
873 |
|
Deduct: Total share-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effect |
|
|
2,318 |
|
|
|
4,763 |
|
|
|
|
Pro forma net income |
|
$ |
4,464 |
|
|
$ |
44,702 |
|
|
|
|
Basic earnings per share, as reported |
|
$ |
.09 |
|
|
$ |
.72 |
|
Pro forma basic earnings per share |
|
$ |
.07 |
|
|
$ |
.66 |
|
Diluted earnings per share, as reported |
|
$ |
.09 |
|
|
$ |
.71 |
|
Pro forma diluted earnings per share |
|
$ |
.07 |
|
|
$ |
.65 |
|
Financial statement amounts for the three and six months ended July 1, 2005 have not been restated
to reflect the fair value method of expensing share-based compensation.
Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the statement of cash
flows. Effective January 1, 2006 and in accordance with SFAS 123(R), the Company changed its cash
flow presentation whereby the cash flows resulting from the tax benefits arising from tax
deductions in excess of the compensation expense recognized for share-based awards (excess tax
benefits) are now classified as financing cash flows. In the unaudited condensed consolidated
statement of cash flows for the six months ended June 30, 2006, the total excess tax benefit of
$2,305 related to share-based compensation included in cash flows from financing activities would
have been included in cash flows from operating activities if the Company had not adopted SFAS
123(R).
The Company received $12,128 in proceeds on the exercise of stock options under the Companys stock
option and employee stock purchase plans and recorded a tax benefit of $3,770 related to these
stock option exercises during the six months ended June 30, 2006.
Under the provisions of SFAS 123(R), the Company is required to estimate the number of all
share-based awards that will be forfeited. Effective January 1, 2006, the Company uses historical
data to estimate forfeitures. Prior to the adoption of SFAS 123(R), the Company recognized the
impact of forfeitures as they occurred.
Shares issued upon the exercise of stock options under the Companys stock option and employee
stock purchase plans are normally from authorized but unissued shares of the Companys Class A
Common Stock. However, to the extent that the Company has treasury shares outstanding, such shares
may be reissued upon the exercise of stock options.
Form 10-Q
Page 8
Stock Options
Under the Companys 1997 Incentive Plan, as amended (the 1997 Plan), 16,000,000 shares of Class A
Common Stock have been reserved for issuance to officers, directors and key employees. In addition
to stock options, any of the following incentives may be awarded to participants under the 1997
Plan: stock appreciation rights (SARs), nonvested shares, unrestricted stock, awards entitling
the recipient to delivery in the future of Class A Common Stock or other securities, securities
that are convertible into, or exchangeable for, shares of Class A Common Stock and cash bonuses.
The option price per share and vesting periods of stock options are determined by the Management
Development and Compensation Committee of the Board of Directors. Outstanding stock options
granted under the 1997 Plan are granted at market value at date of grant and become exercisable
either in equal installments over three years, beginning one year after the grant date, or become
exercisable two years after grant date. Prior to 2006, most stock options granted under the 1997
Plan were exercisable in equal installments over four years. All options expire ten years after
the grant date.
Under our 2001 Non-Employee Directors Stock Plan, as amended (the 2001 Plan), we have reserved
400,000 shares of Class A Common Stock for the granting of stock options to eligible non-employee
directors of the Company. Under the terms of the 2001 Plan, stock option grants are awarded on a
predetermined formula basis. Unless terminated by our Board of Directors, the 2001 Plan will be in
effect until all shares available for issuance have been issued, pursuant to the exercise of all
options granted. The exercise price of options granted under the 2001 Plan is the fair market
value of the stock on the date of the grant. Initial awards of stock options granted under the
2001 Plan to new directors become exercisable in equal installments over three years and annual
awards of options granted under the 2001 Plan become fully exercisable one year from the date of
grant and, in each case, expire ten years after grant date. Stock options granted under the 2001
Plan prior to December 31, 2004 become exercisable in equal installments over four years, beginning
one year after the grant date, and expire ten years after the grant date.
The Company estimates the fair value of its stock option awards on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the following table.
Expected volatility is based on historical volatility of the Companys stock. The expected term of
options granted under the 1997 Plan is estimated using the historical exercise behavior of
employees. The expected term of options granted under the 2001 Plan is calculated using the
simplified method as prescribed by the Securities and Exchange Commissions Staff Accounting
Bulletin No. 107. Prior to adoption of SFAS 123(R), the expected term of options granted under the
2001 Plan was estimated using the historical exercise behavior of directors. The risk-free
interest rate for periods within the contractual life of the option is based on the U.S. Treasury
yield curve corresponding to the stock options average life.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|
June 30, 2006 |
|
July 1, 2005 |
|
June 30, 2006 |
|
July 1, 2005 |
Expected volatility |
|
|
30.5 |
% |
|
|
29.0 |
% |
|
|
30.2 |
% |
|
|
29.6 |
% |
Risk-free interest rate |
|
|
5.0 |
% |
|
|
4.1 |
% |
|
|
4.7 |
% |
|
|
3.6 |
% |
Expected life (in years) |
|
|
4.9 |
|
|
|
9.0 |
|
|
|
4.2 |
|
|
|
5.2 |
|
Expected dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes transactions under all stock option arrangements for the six months
ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Contractual Term |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(Years) |
|
|
Value |
|
Outstanding at January 1, 2006 |
|
|
5,708,184 |
|
|
$ |
25.15 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
685,031 |
|
|
|
33.87 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(609,031 |
) |
|
|
18.28 |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(213,944 |
) |
|
|
28.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
5,570,240 |
|
|
$ |
26.84 |
|
|
|
7.02 |
|
|
$ |
17,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
3,096,750 |
|
|
$ |
23.49 |
|
|
|
5.91 |
|
|
$ |
14,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form 10-Q
Page 9
The weighted-average grant date fair values per share of stock options granted, for which
exercise price equals market value at the date of grant, were $10.63 and $16.76 for the three
months ended June 30, 2006 and July 1, 2005, respectively, and $10.73 and $11.66 for the six
months ended June 30, 2006 and July 1, 2005, respectively. The total intrinsic values of stock
options exercised during the three months ended June 30, 2006 and July 1, 2005 were $361 and
$5,739, respectively, and $9,953 and $13,378 for the six months ended June 30, 2006 and July 1,
2005, respectively.
Information on stock options outstanding and exercisable as of June 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
Range of |
|
Number |
|
|
Contractual Term |
|
|
Weighted- Average |
|
|
Number |
|
|
Weighted-Average |
|
Exercise Prices |
|
Outstanding |
|
|
(Years) |
|
|
Exercise Price |
|
|
Exercisable |
|
|
Exercise Price |
|
$2.17 - 17.74 |
|
|
884,332 |
|
|
|
4.26 |
|
|
$ |
14.07 |
|
|
|
876,532 |
|
|
$ |
14.05 |
|
17.81 - 19.10 |
|
|
127,304 |
|
|
|
5.82 |
|
|
|
18.20 |
|
|
|
72,854 |
|
|
|
18.20 |
|
19.12 - 19.49 |
|
|
699,474 |
|
|
|
6.67 |
|
|
|
19.48 |
|
|
|
444,262 |
|
|
|
19.48 |
|
19.50 - 27.86 |
|
|
577,029 |
|
|
|
7.15 |
|
|
|
24.82 |
|
|
|
356,881 |
|
|
|
24.27 |
|
27.94 - 28.50 |
|
|
557,354 |
|
|
|
4.90 |
|
|
|
28.47 |
|
|
|
529,955 |
|
|
|
28.50 |
|
28.63 - 30.82 |
|
|
120,334 |
|
|
|
8.34 |
|
|
|
29.29 |
|
|
|
20,300 |
|
|
|
29.56 |
|
30.88 - 31.29 |
|
|
944,966 |
|
|
|
7.61 |
|
|
|
31.29 |
|
|
|
477,718 |
|
|
|
31.29 |
|
31.32 - 35.01 |
|
|
835,000 |
|
|
|
9.28 |
|
|
|
34.06 |
|
|
|
61,225 |
|
|
|
32.07 |
|
35.02 - 35.27 |
|
|
4,650 |
|
|
|
9.17 |
|
|
|
35.15 |
|
|
|
1,186 |
|
|
|
35.24 |
|
35.42 - 39.70 |
|
|
819,797 |
|
|
|
8.61 |
|
|
|
35.69 |
|
|
|
255,837 |
|
|
|
35.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.17 - 39.70 |
|
|
5,570,240 |
|
|
|
7.02 |
|
|
$ |
26.84 |
|
|
|
3,096,750 |
|
|
$ |
23.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized share-based compensation expense related to nonvested stock options was $13,092
as of June 30, 2006. The cost is expected to be recognized over the weighted-average period of 1.3
years.
Nonvested Shares
As noted above, the Companys 1997 Plan provides for grants of nonvested shares. The Company
generally grants nonvested shares with a three year vesting period, which is the same as the
contractual term. The Company has assumed no forfeitures with respect to nonvested shares. The
fair value of nonvested share grants is determined by the market value at the date of grant.
Changes in the Companys nonvested shares for the six months ended June 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value |
|
Unvested at January 1, 2006 |
|
|
698,061 |
|
|
$ |
36.27 |
|
Vested |
|
|
(59,142 |
) |
|
|
27.10 |
|
|
|
|
|
|
|
|
Unvested at June 30, 2006 |
|
|
638,919 |
|
|
$ |
37.12 |
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to nonvested share grants was $23,335 as of June 30,
2006. The expense is expected to be recognized over a weighted-average period of 1.06 years.
Under the provisions of SFAS 123(R), we are no longer permitted to record deferred compensation for
the unvested portion of nonvested share grants. Accordingly, upon adoption of SFAS 123(R), the
balance of deferred compensation was reduced to zero, resulting in an offsetting reduction to
additional paid-in capital in the unaudited condensed consolidated balance sheet.
Employee Stock Purchase Plan
Pursuant to the terms of our 1991 Employee Stock Purchase Plan, as amended (the ESP Plan), we are
authorized to issue up to an aggregate of 2,400,000 shares of our Class A Common Stock to eligible
employees electing to participate in the ESP Plan. Eligible employees may contribute, through
payroll withholdings, from 2% to 10% of their regular base compensation during six-month
participation periods beginning January 1 and July 1 of each year. At the end of each
participation period,
Form 10-Q
Page 10
the accumulated deductions are applied toward the purchase of Class A Common Stock at a price
equal to 85% of the market price at the beginning or end of the participation period, whichever is
lower.
The fair value of the Companys ESP Plan was estimated on the date of grant using the Black-Scholes
option valuation model that uses the assumptions in the following table. Expected volatility is
based on the six-month participation period (the stock options contractual and expected lives).
The risk-free interest rate is based on the six-month U.S. Treasury rate.
|
|
|
|
|
|
|
|
|
|
|
For the Three and Six Months Ended |
|
|
June 30, 2006 |
|
July 1, 2005 |
Expected volatility |
|
|
25.9 |
% |
|
|
25.9 |
% |
Risk-free interest rate |
|
|
4.3 |
% |
|
|
2.5 |
% |
Expected life (in months) |
|
|
6 |
|
|
|
6 |
|
Expected dividends |
|
|
|
|
|
|
|
|
The weighted-average fair values of the Companys ESP Plan purchase rights were $6.85 and $6.50 for
the three and six months ended June 30, 2006 and July 1, 2005, respectively.
As of June 30, 2006, all ESP Plan compensation expense was recognized as all ESP Plan awards were
vested.
Note 4. Earnings/(Loss) Per Share
Basic earnings/(loss) per share excludes common stock equivalents and is computed by dividing net
income/(loss) by the weighted-average number of common shares outstanding for the periods
presented. Diluted earnings/(loss) per share (EPS) reflects the potential dilution that would
occur if potentially dilutive securities such as stock options were exercised and nonvested shares
vested. The following is a reconciliation of the number of shares (in thousands) for the basic and
diluted EPS computations for the three and six months ended June 30, 2006 and July 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
June 30, 2006 |
|
|
July 1, 2005 |
|
|
|
|
|
|
Weighted- Average |
|
|
|
|
|
|
|
|
|
|
Weighted- Average |
|
|
|
|
|
|
Net (Loss) |
|
|
Shares |
|
|
Per-Share Amount |
|
|
Net Income |
|
|
Shares |
|
|
Per-Share Amount |
|
Basic EPS |
|
$ |
(12,972 |
) |
|
|
63,035 |
|
|
$ |
(.21 |
) |
|
$ |
6,345 |
|
|
|
66,913 |
|
|
$ |
.09 |
|
Effect of dilutive
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
(12,972 |
) |
|
|
63,035 |
|
|
$ |
(.21 |
) |
|
$ |
6,345 |
|
|
|
68,376 |
|
|
$ |
.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, 2006 |
|
|
July 1, 2005 |
|
|
|
|
|
|
|
Weighted- Average |
|
|
|
|
|
|
|
|
|
|
Weighted- Average |
|
|
|
|
|
|
Net Income |
|
|
Shares |
|
|
Per-Share Amount |
|
|
Net Income |
|
|
Shares |
|
|
Per-Share Amount |
|
Basic EPS |
|
$ |
16,214 |
|
|
|
63,308 |
|
|
$ |
.26 |
|
|
$ |
48,592 |
|
|
|
67,250 |
|
|
$ |
.72 |
|
Effect of dilutive
securities |
|
|
|
|
|
|
1,461 |
|
|
|
(.01 |
) |
|
|
|
|
|
|
1,448 |
|
|
|
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
16,214 |
|
|
|
64,769 |
|
|
$ |
.25 |
|
|
$ |
48,592 |
|
|
|
68,698 |
|
|
$ |
.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following securities (in thousands) were outstanding as of June 30, 2006 and July 1, 2005, but
were not included in the computation of diluted EPS as their
inclusion would be anti-dilutive. Anti-dilutive securities for the
three months ended June 30, 2006 includes 1,077 securities that would
have been included in the computation of diluted EPS had we not
recorded a net loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|
June 30, 2006 |
|
July 1, 2005 |
|
June 30, 2006 |
|
July 1, 2005 |
Anti-dilutive securities |
|
|
3,982 |
|
|
|
4 |
|
|
|
1,431 |
|
|
|
66 |
|
Form 10-Q
Page 11
Note 5. Comprehensive Income/(Loss)
Comprehensive income/(loss) for the three and six months ended June 30, 2006 and July 1, 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, 2006 |
|
|
July 1, 2005 |
|
|
June 30, 2006 |
|
|
July 1, 2005 |
|
Net income/(loss) |
|
$ |
(12,972 |
) |
|
$ |
6,345 |
|
|
$ |
16,214 |
|
|
$ |
48,592 |
|
Change in cumulative translation adjustment |
|
|
6,309 |
|
|
|
(8,846 |
) |
|
|
8,353 |
|
|
|
(13,369 |
) |
Change in fair value of derivative
financial instruments, net of taxes |
|
|
(6,557 |
) |
|
|
10,203 |
|
|
|
(10,305 |
) |
|
|
15,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss) |
|
$ |
(13,220 |
) |
|
$ |
7,702 |
|
|
$ |
14,262 |
|
|
$ |
50,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2006 and July 1, 2005, the after tax hedging gains/(losses)
reclassified to earnings/(loss) were $(320) and $367, respectively. For the six months ended June
30, 2006 and July 1, 2005, the after tax hedging gains/(losses) reclassified to earnings were
$1,906 and $(1,060), respectively.
Note 6. Business Segments and Geographic Information
We manage our business in three reportable segments, each sharing similar product, distribution and
marketing. The reportable segments are U.S. Wholesale, U.S. Consumer Direct and International.
The U.S. Wholesale segment is comprised of the sale of products to wholesale customers in the
United States. This segment also includes royalties from licensed products sold in the United
States, the management costs and expenses associated with our worldwide licensing efforts and
certain marketing expenses and value added services. The U.S. Consumer Direct segment includes the
Company-operated specialty and factory outlet stores in the United States and our e-commerce
business. The International segment consists of the marketing, selling and distribution of
footwear, apparel and accessories and licensed products outside of the United States. Products are
sold outside of the United States through our subsidiaries (which use wholesale and retail channels
to sell footwear, apparel and accessories), independent distributors and licensees.
The Unallocated Corporate component of segment reporting consists primarily of corporate finance,
information services, legal and administrative expenses, United States distribution expenses, a
majority of United States marketing expenses, worldwide product development and other costs
incurred in support of Company-wide activities. It also includes all costs related to share-based
compensation. Additionally, Unallocated Corporate includes total other income, which is primarily
interest income, net, and other miscellaneous income, net. Such income is not allocated among the
reported business segments.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. We evaluate segment performance based on operating contribution,
which represents pre-tax income/(loss) before unallocated corporate expenses, interest and other
income/(expense), net, and operating cash flow measurements. Total assets are disaggregated to the
extent that assets apply specifically to a single segment. Unallocated Corporate assets primarily
consist of cash and equivalents, manufacturing/sourcing assets, computers and related equipment,
and United States transportation and distribution equipment.
Form 10-Q
Page 12
For the Three Months Ended June 30, 2006 and July 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
Unallocated |
|
|
|
|
U.S. Wholesale |
|
Consumer Direct |
|
International |
|
Corporate |
|
Consolidated |
2006 |
|
Revenue |
|
$ |
87,449 |
|
|
$ |
33,239 |
|
|
$ |
105,917 |
|
|
$ |
|
|
|
$ |
226,605 |
|
Operating income/(loss) |
|
|
13,735 |
|
|
|
(106 |
) |
|
|
1,947 |
|
|
|
(36,439 |
) |
|
|
(20,863 |
) |
Income/(loss) before income taxes |
|
|
13,735 |
|
|
|
(106 |
) |
|
|
1,947 |
|
|
|
(35,381 |
) |
|
|
(19,805 |
) |
Total assets |
|
|
234,097 |
|
|
|
30,203 |
|
|
|
323,361 |
|
|
|
97,870 |
|
|
|
685,531 |
|
Goodwill |
|
|
31,745 |
|
|
|
794 |
|
|
|
6,994 |
|
|
|
|
|
|
|
39,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Revenue |
|
$ |
100,524 |
|
|
$ |
34,985 |
|
|
$ |
104,760 |
|
|
$ |
|
|
|
$ |
240,269 |
|
Operating income/(loss) |
|
|
28,451 |
|
|
|
2,768 |
|
|
|
9,051 |
|
|
|
(31,868 |
) |
|
|
8,402 |
|
Income/(loss) before income taxes |
|
|
28,451 |
|
|
|
2,768 |
|
|
|
9,051 |
|
|
|
(30,657 |
) |
|
|
9,613 |
|
Total assets |
|
|
197,646 |
|
|
|
30,727 |
|
|
|
271,961 |
|
|
|
192,662 |
|
|
|
692,996 |
|
Goodwill |
|
|
6,804 |
|
|
|
794 |
|
|
|
6,565 |
|
|
|
|
|
|
|
14,163 |
|
For the Six Months Ended June 30, 2006 and July 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
Unallocated |
|
|
|
|
U.S. Wholesale |
|
Consumer Direct |
|
International |
|
Corporate |
|
Consolidated |
2006 |
|
Revenue |
|
$ |
212,153 |
|
|
$ |
66,299 |
|
|
$ |
297,964 |
|
|
$ |
|
|
|
$ |
576,416 |
|
Operating income/(loss) |
|
|
47,038 |
|
|
|
77 |
|
|
|
53,463 |
|
|
|
(79,188 |
) |
|
|
21,390 |
|
Income/(loss) before income taxes |
|
|
47,038 |
|
|
|
77 |
|
|
|
53,463 |
|
|
|
(75,824 |
) |
|
|
24,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Revenue |
|
$ |
217,342 |
|
|
$ |
73,304 |
|
|
$ |
303,834 |
|
|
$ |
|
|
|
$ |
594,480 |
|
Operating income/(loss) |
|
|
64,373 |
|
|
|
7,234 |
|
|
|
64,090 |
|
|
|
(65,375 |
) |
|
|
70,322 |
|
Income/(loss) before income taxes |
|
|
64,373 |
|
|
|
7,234 |
|
|
|
64,090 |
|
|
|
(62,073 |
) |
|
|
73,624 |
|
Form 10-Q
Page 13
Note 7. Inventory
Inventory, net of reserves, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
July 1, 2005 |
|
|
December 31, 2005 |
|
Materials |
|
$ |
3,372 |
|
|
$ |
3,368 |
|
|
$ |
3,483 |
|
Work-in-process |
|
|
1,064 |
|
|
|
1,612 |
|
|
|
762 |
|
Finished goods |
|
|
206,527 |
|
|
|
211,503 |
|
|
|
162,887 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
210,963 |
|
|
$ |
216,483 |
|
|
$ |
167,132 |
|
|
|
|
|
|
|
|
|
|
|
Note 8. Nonvested Share Awards and Other
In 2004, our Board of Directors approved future awards of nonvested share grants of Class A Common
Stock under the Companys 1997 Incentive Plan, as amended, and a cash incentive award. The award
of these nonvested share grants and the cash incentive award is based on achieving certain
performance targets for the periods occurring between January 1, 2004 through December 31, 2006.
Based on the achievement of 2005 performance targets, 377,770 of nonvested shares
were awarded on July 5, 2006. The value of this award at June 30, 2006 was $10,000. These shares
will fully vest three years from the award date. Based on the achievement of 2004 performance
targets, 275,117 of nonvested shares with a value of $10,873 were awarded on July 5, 2005 and will
vest equally over three years from the award date. An additional grant, based on the achievement
of a separate performance target, of 200,000 nonvested shares with a value of $7,904 was also
awarded on July 5, 2005 and will vest two years after the award date. All of these shares are
subject to restrictions on sale and transferability, a risk of forfeiture and certain other terms
and conditions. Through December 31, 2005, we recorded deferred compensation in stockholders
equity on our unaudited condensed consolidated balance sheet to reflect these awards. Under the
provisions of SFAS 123(R), we are no longer permitted to record deferred compensation in
stockholders equity for unvested awards. For the measurement period from January 1, 2006 through
December 31, 2006, a grant of $8,732 may be made in 2007 if certain targeted performance goals are
achieved. The award amount will vary based upon the degree to which these performance goals are
attained. As of June 30, 2006, we estimate the award amount will be approximately $1,605. The
number of shares to be awarded will be determined by the share price on the award date.
Additionally, a cash incentive award of up to $3,000 may be awarded in 2007 based on the
achievement of a performance target over a three year measurement period from January 1, 2004
through December 31, 2006.
In March 2005, our Board of Directors approved an additional cash incentive award of up to $1,250,
which will be awarded in 2007 and was based on the achievement of a performance target over a one
year measurement period from January 1, 2005 through December 31, 2005. This award is recorded in
other long-term liabilities on the unaudited condensed consolidated balance sheet as of June 30,
2006.
Note 9. Credit Agreement
On June 2, 2006, we entered into an amended and restated unsecured committed revolving credit
facility with a group of banks (Agreement). The Agreement amends and restates the Amended and
Restated Revolving Credit Agreement dated as of April 30, 2004. The Agreement expires on June 2,
2011 and provides for $200,000 of committed borrowings, of which up to $125,000 may be used for
letters of credit. Upon approval of the bank group, we may increase the committed borrowing limit
by $100,000 for a total commitment of $300,000. Under the terms of the Agreement, we may borrow at
interest rates based on Eurodollar rates (approximately 5.3% at June 30, 2006), plus an applicable
margin of between 13.5 and 47.5 basis points based on a fixed charge coverage grid that is adjusted
quarterly. At June 30, 2006, the applicable margin under the facility was 27 basis points. We
will pay a utilization fee of an additional 5 basis points if our outstanding borrowings under the
facility exceed $100,000. We will also pay a commitment fee of 6.5 to 15 basis points per annum on
the total commitment, based on a fixed-charge coverage grid that is adjusted quarterly. At June
30, 2006, the commitment fee was 8 basis points. The Agreement places certain limitations on
additional debt, stock repurchases, acquisitions, amount of dividends we may pay, and certain other
financial and non-financial covenants. The primary financial covenants relate to maintaining a
minimum fixed charge coverage of 3:1 and a leverage ratio of 2:1. We measure compliance with the
financial and non-financial covenants and ratios as required by the terms of the Agreement on a
fiscal quarter basis.
As of June 30, 2006 and July 1, 2005, we had no borrowings outstanding under any of our credit
facilities.
Form 10-Q
Page 14
Note 10. Restructuring Costs
On July 6, 2005, the Company announced plans to consolidate our Caribbean manufacturing operations.
We ceased operations in our Puerto Rico manufacturing facility at the end of 2005 and are
expanding our manufacturing volume in the Dominican Republic.
During the first quarter of 2006, we commenced a plan to create a European finance shared service
center in Schaffhausen, Switzerland. This shared service center will be responsible for all
transactional and statutory financial activities, which are currently performed by our locally
based finance organizations.
The following table sets forth our restructuring activity for the six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
Liabilities at |
|
|
|
|
|
|
|
|
|
|
Liabilities at |
|
|
|
December 31, 2005 |
|
|
Charges |
|
|
Cash Payments |
|
|
June 30, 2006 |
|
Severance and employment related
charges |
|
$ |
3,784 |
|
|
$ |
674 |
|
|
$ |
3,250 |
|
|
$ |
1,208 |
|
Other charges |
|
|
179 |
|
|
|
238 |
|
|
|
283 |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,963 |
|
|
$ |
912 |
|
|
$ |
3,533 |
|
|
$ |
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment related charges consist primarily of severance, health benefits and other
employee related costs incurred due to these two restructuring plans. Other charges consist of
fees related to the closing of our manufacturing facility in Puerto Rico only. The following
tables detail the charges and payments by location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Three |
|
|
|
|
|
|
Months Ended March |
|
|
Months Ended June |
|
|
For the Six Months |
|
|
|
31, 2006 |
|
|
30, 2006 |
|
|
Ended June 30, 2006 |
|
Severance and employment related charges: |
|
|
|
|
|
|
|
|
|
|
|
|
European shared service center |
|
$ |
157 |
|
|
$ |
348 |
|
|
$ |
505 |
|
Puerto Rico manufacturing facility |
|
|
80 |
|
|
|
89 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
Total severance and employment related charges |
|
|
237 |
|
|
|
437 |
|
|
|
674 |
|
Other charges |
|
|
244 |
|
|
|
(6 |
) |
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
481 |
|
|
$ |
431 |
|
|
$ |
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Three |
|
|
|
|
|
|
Months Ended March |
|
|
Months Ended June |
|
|
For the Six Months |
|
|
|
31, 2006 |
|
|
30, 2006 |
|
|
Ended June 30, 2006 |
|
|
Puerto Rico severance and employment related cash payments |
|
$ |
3,063 |
|
|
$ |
187 |
|
|
$ |
3,250 |
|
Other cash payments |
|
|
232 |
|
|
|
51 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,295 |
|
|
$ |
238 |
|
|
$ |
3,533 |
|
|
|
|
|
|
|
|
|
|
|
We completed the Puerto Rico closure in the second quarter of 2006, but will continue to make cash
payments for severance benefits through the second quarter of 2007. European finance shared
service center restructuring activity will also continue through the second quarter of 2007.
Total additional charges of approximately $330 are expected to be incurred over the balance of 2006
and $100 in 2007, which are expected to cover the remaining severance and employment related
charges for the European finance shared service center restructuring activity.
Note 11. Income Taxes
The effective tax rate for the three and six months ended June 30, 2006 and July 1, 2005 was 34.5%
and 34.0%, respectively.
Note 12. Share Repurchase
On August 12, 2005, our Board of Directors approved an additional repurchase of 2,000,000 shares of
our Class A Common Stock. The repurchase of shares under this authorization was completed on May
12, 2006. On February 7, 2006, our Board of Directors approved an additional repurchase of
6,000,000 shares of our Class A Common Stock. As of June 30, 2006,
Form 10-Q
Page 15
5,298,938 shares remained under
this authorization. Shares repurchased totaled 1,173,081 during the quarter ended June
30, 2006.
We may use repurchased shares to offset future issuances under the Companys stock-based employee
incentive plans or for other purposes. From time to time, we use Rule 10b5-1 plans to facilitate
share repurchases.
Note 13. Litigation
We are involved in various litigation and legal matters that have arisen in the ordinary course of
business. Management believes that the ultimate resolution of any existing matter will not have a
material adverse effect on our consolidated financial statements.
Form 10-Q
Page 16
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discusses The Timberland Companys (we, our, us, Timberland or the Company)
results of operations and liquidity and capital resources. The discussion, including known trends
and uncertainties identified by management, should be read in conjunction with the unaudited
condensed consolidated financial statements and related notes. Included herein are discussions and
reconciliations of (i) total Company and International revenue changes to constant dollar revenue
changes, (ii) diluted earnings per share (EPS) to diluted EPS excluding restructuring and related
costs for 2005, (iii) diluted EPS to diluted EPS excluding restructuring and related costs and
including share-based employee compensation costs related to stock option and employee stock
purchase plans for 2005 and (iv) operating income including share-based employee compensation costs
related to stock option and employee stock purchase plans for the second quarter and first half of
2005. Constant dollar revenue changes, which exclude the impact of changes in foreign exchange
rates, diluted EPS excluding restructuring and related costs, diluted EPS excluding restructuring
and related costs and including share-based employee compensation costs related to stock option and
employee stock purchase plans and operating income including share-based employee compensation
costs related to stock option and employee stock purchase plans are not Generally Accepted
Accounting Principle (GAAP) performance measures. We provide constant dollar revenue changes for
total Company and International results because we use the measure to understand revenue changes
excluding any impact from foreign exchange rate changes. Management provides diluted EPS excluding
restructuring and related costs for 2005 because we use the measure to understand earnings
excluding these identifiable expenses. Management provides diluted EPS excluding restructuring and
related costs and including share-based employee compensation costs related to stock option and
employee stock purchase plans for 2005 and operating income including share-based employee
compensation costs related to stock option and employee stock
purchase plans for the second quarter and first half of 2005 to provide comparability to reported results that include share-based employee compensation
costs as prescribed by Statement of Financial Accounting Standards (SFAS) 123(R), Share-Based
Payment.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our
unaudited condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to sales
returns and allowances, realization of outstanding accounts receivable, the carrying value of
inventories, derivatives, other contingencies, impairment of assets, incentive compensation
accruals, share-based compensation and the provision/(benefit) for taxes. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Historically, actual
results have not been materially different from our estimates. Because of the uncertainty inherent
in these matters, actual results could differ from the estimates used in applying our critical
accounting policies. The Company is not aware of any reasonably likely events or circumstances
that would result in materially different amounts being reported. Our significant accounting
policies are described in Note 1 to the Companys consolidated financial statements of our Annual
Report on Form 10-K for the year ended December 31, 2005, except for the Companys accounting for
share-based compensation in connection with the adoption of SFAS 123(R) which is noted below. Our
estimates, assumptions and judgments involved in applying the critical accounting policies are
described in the Managements Discussion and Analysis of Financial Condition and Results of
Operations section of our Annual Report on Form 10-K for the year ended December 31, 2005.
Under SFAS 123(R), the Company estimates the fair value of its stock option awards and employee
stock purchase plan (the ESP Plan) rights on the date of grant using the Black-Scholes option
valuation model. The Black-Scholes model includes various assumptions, including the expected
volatility for stock options and ESP Plan rights and the expected term of stock options. These
assumptions reflect the Companys best estimates, but they involve inherent uncertainties based on
market conditions generally outside of the Companys control. As a result, if other assumptions
had been used, share-based compensation expense, as calculated and recorded under SFAS 123(R) could
have been materially impacted. Furthermore, if the Company uses different assumptions in future
periods, share-based compensation expense could be materially impacted in future periods. See Note
3 for additional information regarding the Companys adoption of SFAS 123(R).
Form 10-Q
Page 17
Overview
Our principal strategic goal is to become the authentic outdoor brand of choice globally. We
continue to develop a diverse portfolio of footwear, apparel and accessories that reinforces the
functional performance, benefits and classic styling that consumers have come to expect from our
brand. We sell our products to consumers who embrace an outdoor-inspired lifestyle through
high-quality distribution channels, including our own retail stores, which reinforce the premium
positioning of the Timberlandâ brand.
To deliver against our long-term goals, we are focused on driving progress on key strategic fronts.
These include enhancing our leadership position in our core footwear business, capturing the
opportunity that we see for outdoor-inspired apparel, extending enterprise reach through
development of new brand platforms and brand building licensing arrangements, expanding
geographically and driving operational and financial excellence while setting the standard for
commitment to the community and striving to be a global employer of choice.
Highlights of our second quarter of 2006 financial performance, compared to the second quarter of
2005, include the following:
|
|
|
Second quarter revenue decreased 5.7% to $226.6 million as constant dollar gains in
international markets and growth in U.S. casual, outdoor and industrial categories were
offset by anticipated declines in U.S. boots and kids sales. |
|
|
|
|
We recorded an operating loss of $20.9 million in the second quarter of 2006 compared to
an operating profit of $8.4 million in the prior year period. These results reflected
anticipated gross profit pressures from lower boot sales, including impacts from higher
product returns and clearance sales, as well as investments in new businesses and
International expansion. |
|
|
|
|
Gross margin decreased from 49.1% to 45.4%, driven by higher levels of off-price and
discounted sales, product mix impacts related primarily to lower boot revenues and higher
product costs. |
|
|
|
|
Operating expenses were $123.7 million, up 12.9% from the prior year period. Growth
reflects increased costs associated with new businesses,
International business expansion,
global category development and higher costs associated with share-based compensation
reflecting new accounting requirements. |
|
|
|
|
Diluted EPS decreased from $.09 to $(0.21). |
|
|
|
|
Cash at the end of the quarter was $108.1 million with no debt outstanding. |
|
|
|
|
The Company continued to demonstrate the values at the center of the
Timberland® brand and enterprise through our commitment to community. In the
quarter, the Company advanced its innovative Nutritional Label initiative. Additionally,
we recently published an updated Corporate Social Responsibility report. |
We continue to target flat to low single digit revenue growth for the full year and expect declines
in comparable EPS performance in the range of 25%, which is at the lower end of our previously
stated profit range. For the purpose of comparison, we estimate that our 2005 EPS would have been
approximately $2.35 after excluding restructuring and related costs and including costs related to
stock options and our employee stock purchase plan.
For the second half of 2006, we are targeting relatively improved performance, with greater
expected challenges in the third quarter. We anticipate relatively flat revenue growth in the
third quarter and expect gross margin declines in the range of 400 basis points, including impacts
from provisional duties on European Union (EU) footwear sourced in China and Vietnam. For the
fourth quarter of 2006, we are targeting high single digit revenue growth and expect more moderate
gross margin pressures in the range of a 100 basis point decline. Timberland will continue to
support investment against its growth strategies, including continued global expansion and
development of Timberlands business portfolio, which will
likely contribute to low double digit
second half operating expense growth, with relatively higher cost growth in the third quarter.
Form 10-Q
Page 18
Results of Operations for the Three Months Ended June 30, 2006 and July 1, 2005
Revenue
Consolidated revenue was down 5.7% in comparison to the second quarter of 2005 as modest constant
dollar gains in our International business and the addition of SmartWool were offset by anticipated
declines in U.S. boots and kids sales. U.S. business revenue totaled $120.7 million, down 10.9%
from the prior year period. International revenues were $105.9 million, up 1.1%, or 2.3% on a
constant dollar basis, over the second quarter of 2005, driven by gains in southern Europe,
distributor markets, Canada and Japan.
Segments Review
We have three reportable business segments (see Note 6): U.S. Wholesale, U.S. Consumer Direct and
International.
U.S. Wholesale revenues for the second quarter of 2006 were $87.4 million, down 13.0% in comparison
to the prior year period, driven by declines in boots and kids footwear, reflecting soft sell
through trends and proactive efforts to ensure balanced inventory positions for our retail partners
in the U.S. boot business. This decrease was partially offset by benefits from our recent
acquisition of SmartWool, which added $5.7 million to second quarter 2006 U.S. Wholesale revenues,
and double digit growth in Timberland® brand apparel sales. Sales of Timberland
PRO®
and mens casual footwear also grew at double digit rates. We anticipate continued
pressure on U.S. boot and kids footwear sales in the second half of 2006, with the greatest impact
in the third quarter.
Timberlands U.S. Consumer Direct revenues decreased 5.0% to $33.2 million, impacted by soft spring
sales results which drove a 6.6% decline in comparable store sales. The sales decrease reflected
declines in mens and womens casual footwear and apparel, partially offset by gains in outdoor
performance footwear. During the second quarter of 2006, we opened one new specialty and two new
outlet stores and are targeting approximately five net store additions this year.
International revenues grew 1.1% to $105.9 million in the second quarter of 2006. On a constant
dollar basis, International revenues expanded 2.3%, reflecting continued growth in Canada, Asia and
Europe. Overall, International revenues increased to 46.7% of total consolidated revenues for the
quarter. European revenues of $73.1 million were relatively flat in comparison to the second
quarter of 2005. On a constant dollar basis, European revenues grew 0.7%. Growth in our European
distributor business, expansion in the key southern European markets of Spain and Italy and gains
in Scandinavia were offset by softer sales results in the U.K. and France. We expect that
comparisons to very strong prior year results in northern European markets will continue to
moderate overall gains in Europe in the second half of the year. By product category, double digit
gains in apparel, womens casual footwear and boots were offset by declines in kids and outdoor
performance footwear, impacted by comparisons to strong prior year sell-in levels. We continue to
expand our retail presence in Europe, opening two new stores, including our second Timberland Boot
CompanyTM store, in the second quarter of 2006. In Asia, revenues grew 0.6%, or 3.5% in
constant dollars, to $27.9 million, driven by growth in Japan and Taiwan. Asias constant dollar
growth reflected gains in both footwear and apparel and accessories, including benefits from our
new
SmartWool®
and MiōnTM brands, supported by continued expansion of our
integrated brand presence across the region. In the second quarter of 2006, we opened three new
stores and shops in Asia and are targeting net additions of approximately 15 Company owned stores
and shops this year.
Products
Worldwide footwear revenue was $150.8 million in the second quarter of 2006, down approximately
15.0% on an actual and constant dollar basis from the prior year period. The decrease was driven
by anticipated declines in boots and kids footwear, partially offset by growth in target expansion
categories such as Timberland PRO® series, mens casual and MiônTM footwear.
Footwear unit sales decreased 12.6%, while the average selling price was down 2.8% in comparison to
the prior year period, reflecting mix impacts from lower boot sales and higher levels of sales
discounts and allowances.
Worldwide apparel and accessories revenue for the second quarter of 2006 grew 20.0%, or 23.0% on a
constant dollar basis, to $71.5 million. This increase was supported by our recent acquisition of
SmartWool, which added $7.0 million to global apparel and accessories revenue, and strong gains in
Timberland® brand apparel sales globally. Apparel and accessories unit sales increased
44.5%, while the average selling price decreased by 16.9%, reflecting the impacts of the addition
of SmartWools products, which have lower average selling prices.
Form 10-Q
Page 19
Channels
The second quarter 2006 revenue decrease is mainly attributable to a 7.5% decline in global
wholesale revenues to $156.1 million. Worldwide consumer direct revenues decreased 1.3% to $70.5
million, driven by a 5.6% decline in comparable store sales impacted by soft U.S. results, lower
international outlet sales and moderate declines in international specialty
stores. We opened eight stores, shops and outlets worldwide in the second quarter of 2006.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 45.4% for the second quarter of 2006,
370 basis points lower than in the second quarter of 2005. Gross margins were pressured by higher
levels of off-price and discounted sales, product mix impacts related to lower sales of boots and
higher comparable product costs. Foreign exchange rate changes partially offset the decrease in
gross margin.
We include the costs of procuring inventory (inbound freight and duty, overhead and other similar
costs) in cost of goods sold. These costs amounted to $20.5 million and $21.8 million for the
second quarters of 2006 and 2005, respectively.
Operating Expense
Operating expense for the second quarter of 2006 was $123.7 million, $14.1 million or 12.9% higher
than the $109.6 million reported in the second quarter of 2005. The operating expense increase
was driven by a $10.4 million increase in selling expense, a $3.3 million increase in general and
administrative expense and restructuring costs of $0.4 million related to the establishment of a
European finance shared service center and consolidation of our Caribbean manufacturing
facilities. Foreign exchange rate changes offset total operating expense growth by $0.3 million
or 0.3%. As a percentage of revenue, operating expense increased 900 basis points to 54.6%
compared to 45.6% in the prior year period. Excluding $4.3 million in additional share-based
employee compensation costs, SmartWools $3.2 million in operating expenses, Miôns $0.8 million
in operating expenses and $0.4 million in restructuring costs, base business operating expense
increased 4.9%, with spending increases related primarily to International business expansion. We
anticipate operating expense will increase at low double digit rates in the second half of 2006,
with relatively higher cost growth in the third quarter, as we continue to support our investment
in global expansion and develop Timberlands business portfolio.
Selling expense for the second quarter of 2006 was $95.6 million, up $10.4 million or 12.2%
compared to the prior year period. The increase was driven by $5.4 million in International
business expansion, $4.7 million in costs related to new businesses and category development and
$2.8 million in share-based employee compensation costs, partially offset by a $2.0 million
reduction in marketing costs. Foreign exchange rate changes offset selling expense growth by $0.4
million or 0.5%.
We include the costs of physically managing inventory (warehousing and handling costs) in selling
expense. These costs totaled $8.2 million and $8.6 million in the second quarters of 2006 and
2005, respectively.
Advertising expense, which is also included in selling expense, was $2.6 million and $4.1 million
in the second quarters of 2006 and 2005, respectively. Advertising costs are expensed at the time
the advertising is used, predominantly in the season that the advertising costs are incurred. The
decrease in advertising expense reflects shifts in spending towards other brand building
activities. Prepaid advertising recorded on our unaudited condensed consolidated balance sheets as
of June 30, 2006 and July 1, 2005 was $1.8 million and $0.9 million, respectively. The increase in
prepaid advertising reflects earlier timing of planned expenditures.
General and administrative expense for the second quarter of 2006 was $27.6 million, $3.3 million
or 13.6% higher than the prior year period. As a percentage of revenue, general and administrative
expense increased 210 basis points over the second quarter of 2005. The increase was driven by
$2.0 million in strategic initiatives, $1.6 million in share-based employee compensation costs,
$1.3 million in costs associated with operating the new European finance shared service center,
$1.1 million related to new business initiatives and $1.1 million of legal and compliance costs.
These increases were offset by a $3.6 million decrease in worldwide incentive compensation costs.
Foreign exchange rate changes related to overall general and administrative expense were flat with
the prior year period.
Form 10-Q
Page 20
Operating Income/(Loss)
We recorded an operating loss of $20.9 million in the second quarter of 2006 compared to an
operating profit of $8.4 million in the prior year period. Operating income/(loss) as a percentage
of revenue decreased from 3.5% to -9.2%, impacted by a decline in U.S. footwear sales; decline in
gross margin resulting from higher levels of off-price and discounted sales, product mix changes
and higher product costs; and higher levels of operating expense, reflecting costs associated with
new businesses, investments in global business expansion and category development and higher
share-based compensation costs. Favorable foreign exchange hedge rate changes partially offset the
operating loss by $1.7 million. For purposes of comparison, operating income for the second
quarter of 2005 would have been $5.6 million had we expensed share-based employee compensation
costs related to our stock option and employee stock purchase plans.
Operating income for our U.S. Wholesale segment was $13.7 million, down 51.7% from the prior year
period. Revenue decreased 13.0% primarily due to lower boot sales, partially offset by $7.0
million in sales from our new SmartWool and Miōn business initiatives. Gross margin deteriorated
640 basis points, driven by a shift in product mix, primarily impacted by lower sales of boots and
higher off-price sales. Higher product related costs also contributed to this decline. Benefits
from new business initiatives partially offset the decrease in gross margin. Operating expense as
a percentage of sales increased 620 basis points, reflecting moderate cost growth over a lower
revenue base including a 240 basis point impact from the addition of SmartWool and Miōn.
Timberlands U.S. Consumer Direct segment posted an operating loss of $0.1 million for the second
quarter of 2006 compared to operating income of $2.8 million in the prior year period. Soft spring
sales drove a 5.0% decline in revenue, while gross margin declined by 350 basis points, reflecting
increased clearance sales and higher footwear costs. U.S. Consumer Direct operated three
additional stores this quarter, contributing to a 6.1% increase in operating expense.
Second quarter 2006 operating income for our International business was $1.9 million, down $7.1
million from the prior year period. International revenue grew 1.1%, or 2.3% in constant dollars,
offset by a 160 basis point decrease in gross margin and a 12.2% increase in operating expense.
The gross margin decrease was driven by higher off-price sales and footwear costs. The operating
expense increase reflected investments in International business expansion.
Our Unallocated Corporate expenses, which include central support and administrative costs, not
allocated to our business segments, increased 14.3% to $36.4 million. Unallocated Corporate
expenses as a percentage of total revenue increased 280 basis points to 16.1% of total revenue.
Excluding changes in share-based employee compensation costs of $5.0 million and restructuring
costs of $0.4 million resulting from our establishment of a European finance shared service
center and the consolidation of our Caribbean manufacturing operations, Unallocated Corporate expenses
decreased 2.6% or $0.8 million from the prior year and represent 13.7% of total revenue. This
decrease was driven by a $5.1 million reduction in worldwide incentive compensation costs,
partially offset by $2.0 million in costs related to strategic initiatives, $0.7 million in
additional legal and compliance costs and $0.6 million in costs associated with operating the new
European finance shared service center.
Other Income and Taxes
Interest income, net, which is comprised of interest income offset by fees related to the
establishment and maintenance of our revolving credit facility and interest paid on short-term
borrowings, was $0.7 million and $1.1 million for the second quarters of 2006 and 2005,
respectively. Interest income, net declined as higher interest rates were offset by lower cash
balances resulting from the acquisition of SmartWool.
Other, net, included $0.6 million and $0.8 million of foreign exchange losses for the second
quarters of 2006 and 2005, respectively, resulting from the timing of settlement of local currency
denominated receivables and payables. These losses were driven by the volatility of exchange rates
within the second quarters of 2006 and 2005 and should not be considered indicative of expected
future results.
The effective income tax rate for the second quarter of 2006 was 34.5%, reflecting full year
estimates incorporating projected impacts from anti-dumping duties on EU footwear. The effective
income tax rate for the second quarter of 2005 was 34.0%.
Form 10-Q
Page 21
Results of Operations for the Six Months Ended June 30, 2006 and July 1, 2005
Revenue
Consolidated revenue decreased 3.0%, or 0.6% in constant dollars, in comparison to the first half
of 2005, driven by declines in U.S. boot and kids footwear sales. This decline was partially
offset by constant dollar gains in international markets, the addition of the SmartWool®
brand to our product portfolio and growth in U.S. apparel and Timberland PRO® series and
mens casual footwear. U.S. business revenue totaled $278.5 million, down 4.2% from the second
half of 2005. International revenues were $298.0 million, down 1.9% from the first half of 2005,
reflecting unfavorable foreign exchange rates over the prior year period. On a constant dollar
basis, International revenues grew 2.8% from the prior year period, supported by gains in Europe,
Asia and Canada.
Segments Review
Timberlands U.S. Wholesale business recorded revenues of $212.2 million in the first half of 2006,
down 2.4% from the prior year period, driven by declines in boots and kids footwear sales. These
decreases were partially offset by benefits from our recent acquisition of SmartWool, which added
$13.4 million to first half U.S. Wholesale revenues, and double-digit growth in Timberland
PRO® footwear, Timberland® brand apparel and mens casual footwear.
Our U.S. Consumer Direct revenues decreased 9.6% to $66.3 million. The decrease was driven by a
9.8% decline in comparable store sales, partially offset by growth in our e-commerce business. The
sales decrease reflected lower sales in boots, casual and kids footwear and apparel, partially
offset by gains in outdoor performance footwear.
International revenues for the first half of 2006 were $298.0 million, down 1.9% from the prior
year, reflecting unfavorable foreign exchange rate changes of $14.2 million. On a constant dollar
basis, International revenues grew 2.8%, reflecting continued growth in Europe, Asia and Canada.
Overall, International revenues increased to 51.7% of total consolidated revenues for the first
half of 2006. European revenues decreased 4.3% to $225.6 million, impacted by unfavorable foreign
exchange rate changes. On a constant dollar basis, European revenues increased 0.9%, supported by
growth in our European distributor business and gains in the key southern European markets of Spain
and Italy. Double digit growth in mens and womens casual footwear and solid gains in apparel and
accessories were partially offset by declines in outdoor performance and kids footwear. In Asia,
revenues of $59.5 million were relatively flat with the prior year. On a constant dollar basis,
Asian revenues expanded 4.5%, driven by gains in Taiwan and Japan and growth in our Asian
distributor business, reflecting our launch in China. Asias growth is supported by gains in both
footwear and apparel and accessories sales.
Products
Worldwide footwear revenue was $404.7 million in the first half of 2006, down 8.8% from the prior
year period. Excluding negative impacts from foreign exchange rates, footwear revenue decreased
6.4%. The decrease was driven by declines in boots and kids footwear, partially offset by growth
in target expansion categories such as Timberland PRO® series and mens casual footwear.
Worldwide footwear unit sales decreased 7.1%, while the average selling price was down 1.7% in
comparison to the prior year period, impacted by decreases in boot sales and relatively higher
levels of sales discounts and allowances.
Worldwide apparel and accessories revenue for the first half of 2006 grew 13.0%, or 17.3% on a
constant dollar basis, to $162.9 million. This increase reflects global growth in
Timberland® brand apparel sales and Timberlands recent acquisition of SmartWool, which
added $16.3 million to global apparel and accessories revenue. Apparel and accessories unit sales
increased 39.0%, while the average selling price decreased by 18.7%, reflecting the impacts of the
addition of SmartWools products, which have lower average selling prices.
Channels
Revenue was down in the first half of 2006 due to decreases in both our wholesale and consumer
direct businesses. Worldwide wholesale revenues were $435.6 million, down 2.0% from the prior
year. Worldwide consumer direct revenues decreased 6.2% from the first half of 2005 to $140.8
million, reflecting an 8.2% decline in comparable store sales impacted by soft U.S. performance,
moderate declines in international specialty store sales and lower excess product sales globally in
Timberland® outlet stores. Globally, we opened thirteen stores, shops and outlets and
closed seven in the first half of 2006.
Form 10-Q
Page 22
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 48.4% for the first half of 2006, 300
basis points lower than the prior year period. The decrease was driven by higher levels of
off-price and discounted sales, product mix impacts related to lower sales of boots and higher
comparable product costs driven by macro factors including increased oil related commodity costs.
We include the costs of procuring inventory (inbound freight and duty, overhead and other similar
costs) in cost of goods sold. These costs amounted to $40.7 million and $43.1 million in the first
halves of 2006 and 2005, respectively.
Operating Expense
Operating expense for the first half of 2006 was $257.5 million, $22.7 million or 9.7% higher than
the $234.8 million reported in the first half of 2005. The operating expense increase was driven
by a $14.4 million increase in selling expense, a $7.4 million increase in general and
administrative expense and restructuring costs of $0.9 million related to the consolidation of our
Caribbean manufacturing facilities and the establishment of a European finance shared service
center. Foreign exchange rate changes offset total operating expense growth by $4.6 million or
2.0%. As a percentage of revenue, operating expense increased 520 basis points to 44.7% compared
to 39.5% in the prior year period. Excluding $8.2 million in additional share-based employee
compensation costs, SmartWools $7.2 million in operating expenses, Miôns $1.3 million in
operating expenses and $0.9 million in restructuring costs, operating expense growth was controlled
to 2.2%, with spending increases related primarily to International business expansion.
Selling expense for the first half of 2006 was $200.4 million, up $14.4 million or 7.7% compared to
the prior year period. The increase was driven by $9.2 million in costs related to new businesses
and category development, $7.4 million related to International business expansion and $5.2 million
in share-based employee compensation costs, partially offset by a $3.7 million decrease in
marketing costs. Foreign exchange rate changes offset selling expense growth by $4.3 million or
2.3%.
We include the costs of physically managing inventory (warehousing and handling costs) in selling
expense. These costs totaled $17.7 million and $17.6 million in the first halves of 2006 and 2005,
respectively.
Advertising expense, which is also included in selling expense, was $8.4 million and $11.3 million
in the first halves of 2006 and 2005, respectively. The decrease reflects shifts in spending
towards other brand building activities.
General and administrative expense for the first half of 2006 was $56.3 million, $7.4 million or
15.2% higher than the prior year period. As a percentage of revenue, general and administrative
expense increased 160 basis points over the first half of 2005. The increase was driven by $3.0
million of share-based employee compensation costs, $2.3 million in strategic initiatives, $2.2
million associated with operating the new European finance shared service center, $2.2 million
related to new business initiatives and $2.0 million of legal and compliance costs. These
increases were offset by a $4.2 million decrease in worldwide incentive compensation costs.
Foreign exchange rate changes offset general and administrative expense growth by $0.3 million or
0.7%.
Operating Income
Operating income for the first half of 2006 was $21.4 million, down $48.9 million from the prior
year period. Operating income as a percentage of revenue decreased from 11.8% in the first half of
2005 to 3.7% in the first half of 2006. The decrease was driven by a decline in U.S. footwear
sales; decline in gross margin resulting from higher levels of off-price and discounted sales,
product mix changes and higher product costs; and higher levels of operating expense, reflecting
costs associated with new businesses, investments in global business expansion and category
development and higher share-based compensation costs. Excluding restructuring costs, operating
income for the first half of 2006 was $22.3 million. For purposes of comparison, operating income
for the first half of 2005 would have been $64.4 million had we expensed share-based employee
compensation costs related to our stock option and employee stock purchase plans.
Operating income for our U.S. Wholesale segment decreased 26.9% to $47.0 million in the first half
of 2006. Revenue was down 2.4%, driven by decreases in boots and kids footwear sales, partially
offset by $15.2 million in sales from the addition of SmartWool and Miôn. Gross margin declined
320 basis points, reflecting product mix impacts, an increase in off-price sales and higher product
costs, partially offset by benefits from new brand initiatives. Operating expense increased 25.5%,
Form 10-Q
Page 23
supported by moderate cost growth over a lower revenue base including a 230 basis point impact from
the addition of SmartWool and Miōn.
U.S. Consumer Directs operating income was $0.1 million for the first half of 2006 compared to
$7.2 million in the prior year period. Revenue decreased 9.6%, driven by a decrease in comparable
store sales. Gross margin declined by 370 basis
points, reflecting higher levels of clearance sales and markdowns, negative product mix impacts and
higher footwear costs. Operating expense increased 4.5%, driven by the addition of three stores
and SmartWools e-commerce business in the first half of 2006.
Operating income for our International business declined 16.6% to $53.5 million in the first six
months of 2006. Revenue decreased 1.9%, while gross margin declined 110 basis points, driven by
increased levels of off-price sales, higher product costs and business mix impacts. Operating
expense increased 3.5% as investments in International business expansion were offset by foreign
exchange impacts, which lowered cost growth by $4.6 million.
Our Unallocated Corporate expenses increased 21.1% to $79.2 million. Unallocated Corporate
expenses as a percentage of total revenue increased 270 basis points to 13.7% of total revenue.
Excluding changes in share-based employee compensation costs of $9.6 million and restructuring
costs of $0.9 million resulting from the consolidation of our Caribbean manufacturing operations
and our establishment of a European finance shared service center, Unallocated Corporate expenses
increased 5.1% or $3.3 million from the prior year and represent 11.9% of total revenue. This
increase was driven by $2.9 million in unfavorable product cost variances, $2.3 million in
strategic initiatives, $1.8 million in legal and compliance
costs and $1.0 million related to operating the new European finance shared service center. These increases were partially offset
by a $5.4 million reduction in worldwide incentive compensation costs.
Other Income and Taxes
Interest income, net, which is comprised of interest income offset by fees related to the
establishment and maintenance of our revolving credit facility and interest paid on short-term
borrowings, was $1.8 million and $2.2 million for the first halves of 2006 and 2005, respectively.
Interest income, net declined as higher interest rates were offset by lower cash balances resulting
from the acquisition of SmartWool.
Other, net included $0.7 million and $0.2 million of foreign exchange gains for the first halves of
2006 and 2005, respectively, resulting from the timing of settlement of local currency denominated
receivables and payables. These gains were driven by the volatility of exchange rates within the
first halves of 2006 and 2005 and should not be considered indicative of expected future results.
The effective income tax rate for the first half of 2006 was 34.5%, reflecting full year estimates
incorporating projected impacts from anti-dumping duties on EU footwear. The effective income tax
rate for the first half of 2005 was 34.0%.
Reconciliation of Total Company and International Revenue Increases/(Decreases) To Constant
Dollar Revenue Increases/(Decreases)
Total Company Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Six Months |
|
|
Ended June 30, 2006 |
|
Ended June 30, 2006 |
|
|
$ Millions Change |
|
% Change |
|
$ Millions Change |
|
% Change |
|
|
|
|
|
Revenue (decrease) (GAAP) |
|
$ |
(13.7 |
) |
|
|
-5.7 |
% |
|
$ |
(18.1 |
) |
|
|
-3.0 |
% |
(Decrease) due to foreign exchange rate changes |
|
|
(1.3 |
) |
|
|
-.6 |
% |
|
|
(14.2 |
) |
|
|
-2.4 |
% |
|
|
|
|
|
Revenue (decrease) in constant dollars |
|
$ |
(12.4 |
) |
|
|
-5.1 |
% |
|
$ |
(3.9 |
) |
|
|
-.6 |
% |
Form 10-Q
Page 24
International Revenue Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Six Months |
|
|
Ended June 30, 2006 |
|
Ended June 30, 2006 |
|
|
$ Millions Change |
|
% Change |
|
$ Millions Change |
|
% Change |
|
|
|
|
|
Revenue increase/(decrease) (GAAP) |
|
$ |
1.2 |
|
|
|
1.1 |
% |
|
$ |
(5.9 |
) |
|
|
-1.9 |
% |
(Decrease) due to foreign exchange rate changes |
|
|
(1.3 |
) |
|
|
-1.2 |
% |
|
|
(14.2 |
) |
|
|
-4.7 |
% |
|
|
|
|
|
Revenue increase in constant dollars |
|
$ |
2.5 |
|
|
|
2.3 |
% |
|
$ |
8.3 |
|
|
|
2.8 |
% |
Management provides constant dollar revenue changes for total Company and International results
because we use the measure to understand revenue changes excluding any impact from foreign
exchange rate changes.
Reconciliation of Diluted EPS to Diluted EPS Excluding Restructuring and Related Costs and
Including Share-Based Employee Compensation Costs Related to Stock Option and Employee Stock
Purchase Plans
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, 2005 |
|
Diluted EPS (GAAP) |
|
$ |
2.43 |
|
Per share impact of restructuring and related costs |
|
|
.04 |
|
|
|
|
|
Diluted EPS excluding restructuring and related costs |
|
|
2.47 |
|
Per share impact of share-based employee
compensation costs related to stock option and
employee stock purchase plans |
|
|
(.12 |
) |
|
|
|
|
Diluted EPS excluding restructuring and related
costs and including share-based employee
compensation costs related to stock option and
employee stock purchase plans |
|
$ |
2.35 |
|
|
|
|
|
Management provides diluted EPS excluding restructuring and related costs because we use the
measure to understand earnings excluding these identifiable expenses. Management provides diluted
EPS excluding restructuring and related costs and including share-based employee compensation
costs to provide comparability to reported results that include share-based employee compensation
costs as prescribed by SFAS 123(R).
Reconciliation of Operating Income to Operating Income Including Share-Based Employee
Compensation Costs Related to Stock Option and Employee Stock Purchase Plans
|
|
|
|
|
|
|
|
|
Amounts in Millions |
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended July 1, 2005 |
|
|
Ended July 1, 2005 |
|
Operating income, as reported |
|
$ |
8.4 |
|
|
$ |
70.3 |
|
Add: Share-based employee
compensation expense
included in reported
operating income |
|
|
.7 |
|
|
|
1.3 |
|
Deduct: Total share-based
employee compensation
expense determined under
fair value based method for
all awards |
|
|
3.5 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
Pro forma operating income |
|
$ |
5.6 |
|
|
$ |
64.4 |
|
|
|
|
|
|
|
|
Management provides operating income including share-based employee compensation costs related to
stock option and employee stock purchase plans to provide comparability to reported results that
include share-based employee compensation costs as prescribed by SFAS 123(R).
Accounts Receivable and Inventory
Accounts receivable was $125.8 million as of June 30, 2006. Excluding SmartWools $6.0 million,
accounts receivable decreased 8.3% to $119.8 million as of June 30, 2006, compared with $130.6
million as of July 1, 2005. The reduction in comparable receivables in the second quarter of 2006
reflected solid collection efforts on reduced revenues. Days sales outstanding were 50 days as of
June 30, 2006, compared with 49 days as of July 1, 2005. Wholesale days sales outstanding were 58
days and 59 days for the second quarters ended 2006 and 2005, respectively.
Inventory was $211.0 million as of June 30, 2006. Excluding SmartWools $11.8 million, inventory
decreased 8.0% to $199.1 million as of June 30, 2006, compared with $216.5 million as of July 1,
2005. The reduction in comparable inventories in the
Form 10-Q
Page 25
second quarter of 2006 reflected continued
efforts to reduce excess inventory as a percentage of overall mix.
Liquidity and Capital Resources
Net cash used by operations for the first half of 2006 was $35.6 million, compared with $37.5
million for the first half of 2005. The decrease in the use of cash in the first half of 2006
compared with 2005 was primarily due to reduced net income offset by a reduction in our investment
in working capital. In the first six months of 2006, our net investment in working capital was
$84.5 million compared to $112.3 million in 2005. The reduction in inventory reflected continued
aggressive efforts to reduce excess inventory as a percentage of overall mix. The reduction in
receivables reflected reduced revenue, offset by business mix effects from higher international
growth. The reduction in cash used for accruals resulted from lower payroll related accruals at
June 30, 2006, compared with December 31, 2005, than in the comparable period for the prior year.
The increase in prepaids was driven by investment in concept shop fixturing and the timing of
payments. The reduction in income taxes payable is due to reduced net
income and payment timing.
Net cash used for investing activities amounted to $16.3 million in the first half of 2006,
compared with $10.0 million in the first half of 2005. Capital
expenditures accounted for $2.9
million of this increase with growth primarily driven by investments
in information systems and manufacturing and distribution equipment. The
increase in other investing activities primarily relates to our acquisition of certain assets of
GoLite LLC, including trademarks.
Net cash used for financing activities was $55.5 million in the first half of 2006, compared with
$66.8 million in the first half of 2005. Cash flows from financing activities reflected share
repurchases of $69.9 million in the first six months of 2006, compared with $80.3 million in the
first six months of 2005. We received cash inflows of $12.1 million in the first half of 2006 from
the issuance of common stock related to the exercise of employee stock options, compared with $13.5
million in the first half of 2005.
On June 2, 2006, we entered into an amended and restated unsecured committed revolving credit
facility with a group of banks (Agreement). The Agreement amends and restates the Amended and
Restated Revolving Credit Agreement dated as of April 30, 2004. The Agreement expires on June 2,
2011 and provides for $200 million of committed borrowings, of which up to $125 million may be used
for letters of credit. Upon approval of the bank group, we may increase the committed borrowing
limit by $100 million for a total commitment of $300 million. Under the terms of the Agreement, we
may borrow at interest rates based on Eurodollar rates (approximately 5.3% at June 30, 2006), plus
an applicable margin of between 13.5 and 47.5 basis points based on a fixed charge coverage grid
that is adjusted quarterly. At June 30, 2006, the applicable margin under the facility was 27
basis points. We will pay a utilization fee of an additional 5 basis points if our outstanding
borrowings under the facility exceed $100 million. We will also pay a commitment fee of 6.5 to 15
basis points per annum on the total commitment, based on a fixed-charge coverage grid that is
adjusted quarterly. At June 30, 2006, the commitment fee was 8 basis points. The Agreement places
certain limitations on additional debt, stock repurchases, acquisitions, amount of dividends we may
pay, and certain other financial and non-financial covenants. The primary financial covenants
relate to maintaining a minimum fixed charge coverage of 3:1 and a leverage ratio of 2:1. We
measure compliance with the financial and non-financial covenants and ratios as required by the
terms of the Agreement on a fiscal quarter basis.
On December 20, 2005, we entered into a $4.5 million committed revolving credit agreement that
matures on December 19, 2006 to provide for SmartWools working capital requirements. Up to $3
million of the facility may be used for letters of credit.
We had uncommitted lines of credit available from certain banks totaling $50 million at June 30,
2006. Any borrowings under these lines would be at prevailing money market rates (approximately
5.6% at June 30, 2006). Further, we had 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 the Company.
As of June 30, 2006 and July 1, 2005, we had no borrowings outstanding under any of our credit
facilities.
Management believes that our capital needs and our share repurchase program for the balance of 2006
will be funded through our current cash balances, our existing credit facilities and cash from
operations, without the need for additional permanent financing. However, as discussed in Item 1A,
Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2005 and in Part
II, Item 1A, Risk Factors, of this report, several risks and uncertainties could cause the Company
to need to 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. The availability and terms of any such financing would be subject to
prevailing market conditions and other factors at that time.
Form 10-Q
Page 26
Off Balance Sheet Arrangements
As of June 30, 2006 and July 1, 2005, we had letters of credit outstanding of $40.3 million and
$32.4 million, respectively. These letters of credit were issued predominantly for the purchase of
inventory. The increase in letters of credit outstanding was driven by higher apparel purchases
and obligations associated with provisional anti-dumping duties on European Union footwear sourced
in China and Vietnam. As of June 30, 2006, the Company had $157.3 million in foreign currency
contracts outstanding, all of which are due to settle within the next 10 months.
We have the following off balance sheet arrangements:
(Dollars in Millions)
|
|
|
|
|
|
|
Total Amounts |
|
June 30, 2006 |
|
Committed |
|
|
Lines of credit |
|
$ |
|
|
Letters of credit |
|
|
40.3 |
|
Foreign currency
contracts |
|
|
157.3 |
|
|
|
|
|
Total |
|
$ |
197.6 |
|
|
|
|
|
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
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. We anticipate that capital requirements for the balance of 2006 will be met through
the use of our current cash balances, through our existing credit facilities (which place certain
limitations on additional debt, stock repurchases, acquisitions and on the amount of dividends we
may pay, and also contain certain other financial and operating covenants) and through cash flow
from operations, without the need for additional permanent financing. However, if the need arises,
our ability to obtain any additional credit facilities will depend upon prevailing market
conditions, our financial condition and the terms and conditions of such additional facilities.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No.
109, which clarifies the accounting for uncertainty in income tax positions. FIN 48 requires a
company to recognize in its financial statements the impact of a tax position, if that position is
more likely than not of being sustained upon examination by the appropriate taxing authority, based
on the technical merits of the position. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact FIN 48 will have on our consolidated financial position and results of
operations.
Form 10-Q
Page 27
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 income/(loss). We regularly assess these risks and have established policies and
business practices that should result in an appropriate level of protection against 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 in our hedging of foreign currency transactions. These debt
instruments and 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
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. At June 30, 2006 and July 1, 2005, 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 minimize the impact
of these foreign currency fluctuations by hedging the related transactions with foreign currency
forward contracts. These foreign currency forward contracts will expire in 10 months or less.
Based upon sensitivity analysis as of June 30, 2006, a 10% change in foreign exchange rates would
cause the fair value of our financial instruments to increase/decrease by approximately $16.2
million, compared with $13.3 million at July 1, 2005. The increase at June 30, 2006, compared with
July 1, 2005, is primarily related to an increase in our foreign currency denominated net assets at
June 30, 2006, compared with July 1, 2005.
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 as of June 30, 2006, 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.
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 June 30,
2006, that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Form 10-Q
Page 28
Part II OTHER INFORMATION
Item 1A. RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements. As discussed in Part
I, Item 1A, Risk Factors, entitled Cautionary Statements for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995 of our Annual Report on Form
10-K for the year ended December 31, 2005, investors should be aware of certain risks,
uncertainties and assumptions that could affect our actual results and could cause such results to
differ materially from those contained in forward-looking statements made by or on behalf of us in
our periodic reports filed with the Securities and Exchange Commission, in our annual report to
shareholders, in our proxy statement, in press releases and other written materials and statements
made by our officers, directors or employees to third parties. Such statements are based on
current expectations only and actual future results may differ materially from those expressed or
implied by such forward-looking statements due to certain risks, uncertainties and assumptions. We
discuss below any material changes in the risks, uncertainties and assumptions previously disclosed
in our Annual Report on Form 10-K for the year ended December 31, 2005. We encourage you to refer
to our Form 10-K to carefully consider these risks, uncertainties and assumptions. We undertake no
obligation to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Risks Related to our Business
We conduct business outside of the United States which exposes us to foreign currency, import
restrictions and duties and other risks.
On March 22, 2006, the European Commission imposed provisional duties on leather upper
footwear originating from China and Vietnam and imported into European Member States. These
provisional duties, which began on April 7, 2006, are expected to be effective for a six-month
period and will be phased in over a period of five months, beginning at a rate of about 4% and
ending at a 19.4% rate for China sourced footwear and at a 16.8% rate for Vietnam sourced
footwear. These duties may become definitive on or before October 7, 2006. The Company is
advancing strategies in response to this action, including potential price increases on footwear
products sold in Europe. Our estimate is that the implementation of such duties will likely
reduce our 2006 operating profits in the range of $7-$8 million. The implementation of these
duties, which results in additional expenses in lower tax rate jurisdictions, has also had a
negative impact on the Companys effective tax rate, which is estimated at 34.5% for 2006.
Form 10-Q
Page 29
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES(1)
For the Three Fiscal Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1 April 28 |
|
|
306,708 |
|
|
$ |
34.05 |
|
|
|
306,708 |
|
|
|
6,165,311 |
|
April 29 May 26 |
|
|
381,355 |
|
|
|
28.83 |
|
|
|
381,355 |
|
|
|
5,783,956 |
|
May 27 June 30 |
|
|
485,018 |
|
|
|
27.18 |
|
|
|
485,018 |
|
|
|
5,298,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 Total |
|
|
1,173,081 |
|
|
$ |
29.51 |
|
|
|
1,173,081 |
|
|
|
|
|
Footnote (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved |
|
|
|
|
Announcement |
|
Program |
|
Expiration |
|
|
Date |
|
Size (Shares) |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
Program 1 |
|
|
10/27/2005 |
|
|
|
2,000,000 |
|
|
None |
Program 2 |
|
|
02/09/2006 |
|
|
|
6,000,000 |
|
|
None |
Program 1 was completed on May 12, 2006. No other existing programs expired or were terminated during the reporting 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 |
Form 10-Q
Page 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) |
|
We held our Annual Meeting of Stockholders on May 18, 2006 (the Annual Meeting). |
|
(b) |
|
At the Annual Meeting, proxies were solicited pursuant to Regulation 14A of the Securities
Exchange Act of 1934 and all nominees for director were elected as indicated by the following
schedule of votes cast for each director. The holders of Class A Common Stock elected the
following directors: |
|
|
|
|
|
|
|
|
|
|
|
Total Votes for |
|
Total Votes Withheld |
Nominee |
|
Each Director |
|
from Each Director |
Ian W. Diery |
|
|
45,032,452 |
|
|
|
3,082,349 |
|
Irene M. Esteves |
|
|
43,600,257 |
|
|
|
4,514,544 |
|
John A. Fitzsimmons |
|
|
45,014,982 |
|
|
|
3,099,819 |
|
The holders of Class A Common Stock and the holders of Class B Common Stock voting together as a
single class elected the following directors:
|
|
|
|
|
|
|
|
|
|
|
Total Votes for |
|
Total Votes Withheld |
Nominee |
|
Each Director |
|
from Each Director |
Sidney W. Swartz |
|
|
162,063,387 |
|
|
|
3,488,014 |
|
Jeffrey B. Swartz |
|
|
162,987,619 |
|
|
|
2,563,782 |
|
Virginia H. Kent |
|
|
163,020,413 |
|
|
|
2,575,988 |
|
Kenneth T. Lombard |
|
|
162,613,402 |
|
|
|
2,937,999 |
|
Edward W. Moneypenny |
|
|
162,109,479 |
|
|
|
3,441,922 |
|
Peter R. Moore |
|
|
161,529,177 |
|
|
|
4,022,224 |
|
Bill Shore |
|
|
160,289,174 |
|
|
|
5,262,227 |
|
Terdema L. Ussery, II |
|
|
162,630,588 |
|
|
|
2,920,813 |
|
There were no abstentions or broker non-votes with respect to the election of the director
nominees.
Form 10-Q
Page 31
Item 6. EXHIBITS
|
|
|
|
|
Exhibits. |
|
|
|
|
|
|
|
|
|
Exhibit 10.1
|
|
|
|
Second Amended and Restated Revolving Credit Agreement dated as of June 2, 2006 among The Timberland Company, certain banks listed therein and Bank of America, N.A., 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. |
Form 10-Q
Page 32
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 8, 2006 |
By: |
/s/ BRIAN P. MCKEON
|
|
|
|
Brian P. McKeon |
|
|
|
Executive Vice President-Finance and Administration, Chief Financial Officer |
|
|
|
|
|
Date: August 8, 2006 |
By: |
/s/ JOHN CRIMMINS
|
|
|
|
John Crimmins |
|
|
|
Vice President, Corporate Controller and Chief Accounting Officer |
|
Form 10-Q
Page 33
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
|
|
|
Exhibit 10.1
|
|
Second Amended and Restated Revolving Credit Agreement dated
as of June 2, 2006 among The Timberland Company, certain
banks listed therein and Bank of America, N.A., 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. |