UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission File Number 1-9548
The Timberland
Company
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or Organization)
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02-0312554
(I.R.S. Employer
Identification No.)
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200 Domain Drive, Stratham,
New Hampshire
(Address of Principal
Executive Offices)
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03885
(Zip Code)
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Registrants telephone number, including area code:
(603) 772-9500
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A Common Stock, par value $.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
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Yes
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No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
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Yes
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No
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.
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Yes
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No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting
company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of Class A Common Stock of the
Company held by non-affiliates of the Company was $1,220,010,695
on June 29, 2007, which was the last business day of the
Companys second fiscal quarter in 2007. For purposes of
the foregoing sentence, the term affiliate includes
each director and executive officer of the Company. See
Item 12 of this Annual Report on
Form 10-K.
On February 22, 2008, 48,371,257 shares of the
Companys Class A Common Stock and
11,743,660 shares of Class B Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys definitive Proxy Statement for
the 2008 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A are incorporated by reference in
Part III, Items 10, 11, 12, 13 and 14, of this Annual
Report on
Form 10-K.
TABLE OF CONTENTS
PART I
Overview
The Timberland Company was incorporated in Delaware on
December 20, 1978. We are the successor to the Abington
Shoe Company, which was incorporated in Massachusetts in 1933.
We refer to The Timberland Company, together with its
subsidiaries, as we, our,
us, Timberland or the
Company.
We design, develop, engineer, market and distribute, under the
Timberland
®
,
Timberland
PRO
®
,
SmartWool
®
,
Timberland Boot
Company
tm
,
Miōn
®
,
GoLite
®
,
Howies
®
and
IPATH
®
brands, premium quality footwear, apparel and accessories
products for men, women and children. These products provide
functional performance, classic styling and lasting protection
from the elements. We believe that the combination of these
features makes our products an outstanding value and
distinguishes us from our competitors.
Our products are sold primarily through independent retailers,
better-grade department stores, athletic stores and other
national retailers that reinforce the high level of quality,
performance and service associated with Timberland. In addition,
our products are sold in
Timberland
®
specialty stores and
Timberland
®
factory outlet stores dedicated exclusively to selling
Timberland
®
and
Timberland
®
sub-branded products, as well as through franchised retail
stores in Europe. We also sell our products in the United States
online at timberland.com and smartwool.com, and in the United
Kingdom online at timberlandonline.co.uk. Our products are sold
throughout the United States, Canada, Europe, Asia, Latin
America, South Africa and the Middle East.
Our principal strategic goal is to become the authentic outdoor
brand of choice globally by offering an integrated product
selection of footwear, apparel and accessories for men, women
and children that is inspired by the outdoors. Our ongoing
efforts to achieve this strategic goal include
(i) enhancing our leadership position in our core
Timberland
®
footwear business globally through an increased focus on
consumer segment development and technological innovation,
(ii) expanding our global apparel business by leveraging
the brands rugged heritage and consumer trust through
establishment of licensing arrangements with globally trusted
partners, such as Phillips-Van Heusen, (iii) expanding our
brands geographically, (iv) driving operational and
financial excellence, (v) setting the standard for
commitment to the community and (vi) striving to be a
global employer of choice.
Products
Our products fall into three primary
groups: (1) footwear, (2) apparel and accessories
(including product care and licensed products) and
(3) royalties from third-party licensees and distributors.
The following summarizes our revenue by product for the past
three years:
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Product
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2007
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2006
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2005
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Footwear
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70.0
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%
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71.9
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%
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76.6
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%
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Apparel and Accessories
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28.6
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%
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26.9
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%
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22.3
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%
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Royalty and Other
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1.4
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%
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1.2
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%
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1.1
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%
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Footwear
In 1973, we produced our first pair of waterproof leather boots
under the
Timberland
®
brand. We offer a broad variety of footwear products for men,
women and children, featuring premium materials,
state-of-the-art functional design and components and advanced
construction methods. Our key
Timberland
®
brand footwear categories are boots, mens and womens
casual, kids and outdoor performance. The Timberland
PRO
®
series for skilled tradespeople and working professionals is an
additional footwear category we developed to address a consumer
groups distinct needs. In 2007, we continued our focus on
developing products to meet the needs of distinct consumer
groups. One example of this was our acquisition of the assets of
IPATH, LLC. IPATH designs, develops and markets skateboarding
inspired casual footwear, apparel and accessories. In 2006 we
developed a new line of advanced footwear for trail running
enthusiasts under the
GoLite
®
brand. This
2
footwear line is designed to meet the needs of high-altitude
runners by being ultra-light and adaptable to the uneven, rugged
terrain found in the mountains. In 2005 we introduced Timberland
Boot
Company
tm
work-wear inspired footwear that is featured in our Timberland
Boot
Company
tm
concept store in the United Kingdom and we also introduced
Miōn
®
outdoor performance footwear designed to meet the needs of water
adventurers. We intend to continue our efforts to selectively
extend our brand reach through these and other initiatives but
our primary focus in 2008 will be on reinvigorating our core
Timberland
®
brand footwear business. Our refocus on developing our core
footwear business is intended to return our business to healthy
financial performance and to advance our goal of becoming a
leading global brand. Our advanced concepts footwear team, which
we call the Invention Factory, continues to focus on developing
the next innovations in footwear products and technologies,
materials, constructions and processes. Technology that is or
will be incorporated in most of our footwear products is
discussed below in Footwear Technology.
Boots
Our key boots categories include Classic Boots, in basic,
premium, chukka and oxford versions, as well as Roll-Tops and
Chelseas. Another important boot category is our Classic Sport
Boots. A few of the key products in this category include the
Field Boot, Euro Hiker, and Euro Dub Hiker, which are light and
flexible, built to be rugged and durable, while still allowing
for enhanced agility. Some of the principal features of these
boot products include premium waterproof leather, direct-attach
and seam-sealed waterproof construction, rubber lug outsoles for
superior traction and abrasion resistance, shock diffusion
plates, durable laces, padded collars for comfortable fit,
enhanced insulation, rustproof hardware for durability and
moisture-wicking components for comfort and breathability. We
continued our focus on reducing the seasonality of our boots
business by again marketing the Summer Mesh series with
Timberland
®
Vent Tech material, which features lightweight breathable mesh
construction. We added the
Timberland
®
Vent Tech material into additional boot styles throughout 2007.
In late 2007 we reintroduced key boot styles from past seasons
in their exact form, detail for detail, under our Timberland
Authentics line. We also made efforts to improve the quality of
materials in color extensions of classic boots and eliminated
underperforming themes that were inconsistent with brand
platform. Lifestyle footwear, as well as active and casual based
sandals, broadens the core product range. Regional programs such
as Rugged Street and Cruise Master serve to drive consumer
interest in new markets. We are also focused on expanding our
womens boot business, supported by the introduction of
womens specific collections like the Chronicle and Crepe,
which blend functional practicality with fashion elements.
Mens
Casual
Our
Timberland
®
mens casual footwear series includes Boat, Casual, Rugged
Casual, Work Casual, Casual Sport, Sandals and
Timberland
®
LTD. Featured footwear products in these categories include boat
shoes, casual bucks, loafers, sandals, oxfords, chukkas, boots
and slip-ons for use in the office, home or outdoors. Our focus
in the development of this line of footwear is to combine the
rugged heritage of Timberland with premium leathers and
functional offerings. In 2007 we incorporated sustainable and
recycled materials into a casual offering and successfully
launched our
Earthkeepers
tm
collection. Mens casual footwear is rooted in
craftsmanship and innovation, creating products that possess
superior materials and enhanced comfort. Many of our mens
footwear products incorporate our innovative Smart
Comfort
®
system, which provides superior comfort while preserving the
shape and style of the footwear. Expanding the reach of our
casual product, in 2007 we introduced the Timberland Boot
Company
tm
line in the United States to provide a relevant assortment with
distinctive leathers and silhouettes built upon our heritage of
leather innovation. This line was originally offered for the
first time in 2005 in the United Kingdom.
Womens
Casual
Timberland
®
womens footwear line builds on the Rugged Casual and Sport
Casual footwear offering with the introduction of the
Timberland
®
City product collection. This collection provides product for a
more refined wearing occasion for our Engager consumer, a woman
who is confident, active, cares about the environment and looks
for ways to get involved in the world around her.
Timberland
®
City product
3
encompasses higher heel heights, sleeker last shapes and a more
refined styling overall. We have followed a good/better/best
strategy in the construction of the line with Essentials, Key
items and Premium product offerings: Essentials are seasonal and
seasonless basics with replenishment capabilities; Key items are
seasonal items with fresh style and color injections; and
Premium items provide seasonal positioning styles that clearly
articulate the seasonal creative story with elevated design
details.
Our focus in the development of this line of footwear was to
combine the rugged heritage of Timberland with premium leathers,
craftsmanship and relevant functionality with feminine styling
for the target consumer. To provide unparalleled comfort without
sacrificing style, most of our womens product also
incorporates our innovative Smart
Comfort
®
system.
Kids
Casual
Timberland
®
kids footwear products are designed and engineered
specifically for kids with the same high-quality standards and
materials as our adult footwear products. This line includes
Rugged Casual, Outdoor Performance/Adventure, Sport Casual and
toddlers and infants product categories. Featured products focus
on fit and functionality and include programs like Kerplunc,
Rock Skipper sandals, Power Lounger, Hikers with
Gore-Tex
®
material and Snow Stomper winter boots. The toddlers and infants
category provides premium leathers, linings and details designed
and engineered specifically for the needs of this consumer. Many
of our kids footwear products incorporate the Smart
Comfort
®
system.
Outdoors
Outdoor
Performance
Our
Timberland
®
outdoor performance footwear series continues to address the
needs of outdoor recreationalists of all levels, offering
technical, end-use driven products for outdoor adventures from
summit to sea and everywhere in between. Across this series of
footwear we continue to target three core categories
hiking, sport utility and tech casual.
In 2007, we added more technology and more innovation to our
versatile collection of performance footwear. We partnered with
world-renowned high altitude adventurer Ed Viesturs in 2006 to
help us develop the Cadion hiking program, which has since won
acclaim as a market-leading lightweight hiker. We also marked
2007 with the launch of B Life, a millennial consumer focused
initiative featuring a
SmartWool
®
lining and performance features for a younger outdoor athlete.
The Outdoor Performance line continues to be built upon the
Timberland
®
Agile IQ platform, which addresses key areas of traction, shock
absorption and fit to deliver out of the box comfort and enhance
control and position sense on the trail.
Building on the Companys long-term initiative to offer
performance and value to the entry-level outdoor recreationalist
consumer, we offered lines like the Ossipee and the Resolve,
which help make the outdoors more accessible to a variety of
consumers.
Miōn
®
Footwear
Our performance water line was first introduced in 2005 under
the
Miōn
®
brand name.
Miōn
®
water shoes include a performance water shoe, a performance
sandal, a guide slide and a pro thong for men, women and
children.
Miōn
®
footwear is designed for comfort and versatility in all wet
conditions for the outdoor adventurers active lifestyle.
Miōn
®
footwear features an
Ergomorphic
tm
footbed that molds itself to each individual foot, a rib
structure that wraps around the foot in critical areas to ensure
the foot is held in place, a climbing-grade spiral cord that
traces the rib structure to secure the foot and an outsole
constructed of
Gripstick
tm
wet/dry traction rubber, which combines multi-directional
QuadCut
tm
siping and proprietary compounds that improve grip in wet
conditions.
GoLite
®
Footwear
Our Invention Factory developed a new line of advanced footwear
in 2006 for trail running enthusiasts under the
GoLite
®
brand. This footwear line is inspired by the extreme challenges
of sky runners, or high-
4
altitude runners, and their need for ultra-light, technically
advanced footwear. The advanced technology includes an
independent spring suspension system that adapts to uneven,
rugged terrain and improves the runners stability. This
new line appeared in the market in March 2007. The initial
distribution included highly regarded retail trendsetters in the
outdoor and running specialty channels. Timberland acquired
certain assets of GoLite LLC, including trademarks, in 2006.
GoLite LLC continues to market apparel, equipment and
accessories as an independent company not affiliated with us.
IPATH
®
Footwear
In 2007 we purchased substantially all of the assets of IPATH,
LLC. IPATH designs, develops and markets skateboarding-inspired
casual footwear, apparel and accessories. The
IPATH
®
brand mantra is Follow Your Path and represents a
confluence of youth lifestyles, drawing strong influence from
music, art and culture.
Timberland
PRO
®
Series
We continue to expand and broaden our offering of high
performance work shoes specifically designed for working
professionals who need the best in comfort, durability and
protection under the Timberland
PRO
®
series sub-brand. In 2007, we continued to expand our selection
in the occupational category by adding a slip resistance series
named Black targeting the hospitality industry, and
a line of lightweight performance boots named Valor
aimed at first responders and public safety professionals. The
Black series is a line of slip resistant dress shoes designed
for professionals who work in a variety of work environments
such as restaurants, hotels, leisure facilities, and other
service environments. The shoes feature premium leathers and
fabrics, slip resistant outsoles, include third party technology
such as
Scotchgard
tm
protector and offer a
30-day
comfort guarantee. The Black series also features Timberland
PreciseFit
tm
technology, which provides end-users better fit and improves
retailer inventory turns due to carrying fewer sizes. The Valor
series is a selection of footgear designed for first responders
such as medical personnel, law enforcement officials, security
officers, and other public safety professionals. This product
was designed for rugged and challenging working conditions,
incorporates premium leathers and fabrics, and offers premium
positioning in the category via third party technology such as
GoreTex
®
membrane and
Thinsulate
tm
insulation. The Valor series also offers a 30 day comfort
guarantee, and also includes Timberland
PreciseFit
tm
technology. We continued to expand the best selling
TiTAN
®
collection, targeted at those who prefer lightweight comfort,
with various silhouettes and styles. All
TiTAN
®
styles feature the innovative
TiTAN
®
safety toe and our exclusive
PowerFit
tm
comfort system, which provides superior fit, cushioning and
shock absorption, and offers the 30 day comfort guarantee.
In addition to the
TiTAN
®
styles, we continued to expand the selection of PowerWelt series
featuring
Ever-Guard
tm
genuine leather. This abrasion resistant leather provides the
ultimate in protection in challenging work environments, and
increases consumer wear time with abrasion resistant
Ever-Guard
tm
genuine leather. Also, in 2007, Timberland PRO introduced an
innovative insulated and waterproof work boot called Thermal
Force. Aimed at those who work in cold temperatures, Thermal
Force utilizes an insulated toe cap and nanotechnology in the
lining to keep feet warm and regulate temperatures. The Thermal
Force comes with Timberland
PRO
®
Rubber Ice-Trax outsole for better grip on icy conditions. All
of our waterproof styles utilize seam-sealed or membrane
constructions and temperature regulating foot beds, and all of
our safety toe styles meet
ANSI/AS
tm
standards. Most styles also come with slip, abrasion and
oil-resistant outsoles, as well as electrical hazard protection.
In 2007, Timberland PRO won Tractor Supply Companys Total
Company Large Vendor of the Year Award for Timberland PROs
efforts in building Tractor Supply Companys leather
footwear business under the C. E. Schmidt private label program.
Footwear
Technology
We continue to incorporate our patent pending, technological
innovation, the Smart
Comfort
®
system, in many of our mens, womens and kids
footwear categories. The Smart
Comfort
®
system allows the footwear to expand and contract with the
changing shape of the foot during the walking motion, while
preserving the essential style of the footwear. Footwear
incorporating the Smart
Comfort
®
system provides superior comfort in a product that retains its
shape. The Smart
Comfort
®
systems expandable upper allows the shoe to follow
5
the natural movements of the foot without pinching the top of
the foot. A three-zone, multi-density footbed system provides
even pressure distribution under the foot. These systems work
together to distribute forces and provide superior comfort
everywhere the shoe touches the foot.
Our patent-pending
Timberland
®
PreciseFit
tm
system has been incorporated into select styles of mens
footwear lines since 2006. The
PreciseFit
tm
system enables consumers to customize their fit through a system
of forefoot inserts. Each pair of footwear includes a set of
inserts of varying thicknesses that lock onto a removable
footbed, creating optimal volume in each shoe and allowing for
differences between the left and right foot. This tailored fit
works in conjunction with the Smart
Comfort
®
system to give consumers a high level of fit and comfort.
Many
Timberland
®
footwear products offer or will be designed to offer other
advanced technologies developed by us that combine some or all
of the following features:
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Footwear Modular System our patented modular shoe
technology which enables the user to customize the walking
platform/footbed and shell of a shoe for multiple end use
situations;
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Endoskeleton
tm
internal suspension system our patented technology
designed to control heel impact deflection and provide arch
support, forefoot flexibility and torsional stiffness for
comfort and performance;
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B.S.F.P.
tm
motion efficiency system our design which delivers
improved traction, energy-return and length of wear;
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Independent Suspension
Network
tm
system
(ISN
tm
)
our multi-density sole with independent lugs adapts to the
terrain, keeping the foot level on uneven ground for superior
stability, traction and comfort;
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Advanced Combination Construction (ACC) a
construction method that delivers improved forefoot flexibility
for maneuverability and rear foot stability on rugged terrain;
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Timberland
®
Agile IQ system our outdoor performance footwear
technology which delivers improved traction, shock absorption
and fit for improved control and sense of position;
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Comforia
tm
system our womens footwear technology enabling
comfort with style, regardless of footwear style or heel height;
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Guaranteed waterproof construction;
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Timberland
®
EasyDry
tm
Pull Out Liner patent pending liner that pulls out
of the shoe for quick and easy drying, and currently used in
certain of our Outdoor Performance footwear products; and
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Detachable Weatherproof Gaiter System patent pending
lower leg covering that attaches to the shoe helping to keep
water, sand and other items out of the shoe, and used in certain
of our Outdoor Performance and
GoLite
®
footwear products.
|
Apparel
and Accessories
Timberland
®
and Timberland
PRO
®
Series
Timberlands apparel offer for men and kids continues to
represent a rugged casual line that includes outerwear and
sportswear that combine performance benefits and technical
fabrics for the outdoors with versatile styling. Timberland also
offers a womens apparel line that is primarily distributed
in Europe. We believe that continuing to develop and expand our
apparel business is important to our global brand aspirations.
To help maximize our brand potential, on February 7, 2007,
we announced that beginning in Fall 2008 our
Timberland
®
brand apparel line will be offered in North America pursuant to
a licensing arrangement with Phillips-Van Heusen. We believe
that working with a powerful partner like Phillips-Van Heusen
will maximize our brand potential because of their apparel
expertise and strong distribution network. We will continue to
design, source and market
Timberland
®
apparel for our European and Asian operations through our London
based International Design Center, which enables us to remain
close to the target consumers we
6
will continue to serve directly. We will also continue to
design, source and market worldwide
Timberland
®
Outdoor Performance apparel. We reintroduced Timberland
PRO
®
apparel in the United States and Canada in 2007 pursuant to a
licensing arrangement and will continue to offer it in Europe
pursuant to a licensing arrangement that has been in effect
since 2004.
During 2007, we continued to underpin the mens and
womens apparel lines with a commitment to our
Earthkeepers initiative that reflects the
intersection of product design and environmental stewardship.
Organic cotton, recycled yarns, and low impact materials that
are biodegradable and sustainable, along with earth friendly
manufacturing processes, have all been introduced into the line
to ensure we create an ongoing commitment to minimize our
environmental impact. We also continued our efforts to refine
the
Timberland
®
Limited Collection, a premium offering of apparel for our
international consumers. This line both compliments and elevates
our overall apparel assortment.
SmartWool
Our acquisition of SmartWool Corporation at the end of 2005
extended our enterprises reach by offering our customers
an expanded line of apparel and accessories. SmartWool is a
leading provider of premium performance merino wool-based socks,
apparel and accessories for men, women and children. Our key
SmartWool
®
product categories are performance and lifestyle socks for men,
women and children and 100%
SmartWool
®
Next-to-Skin apparel in core base layer styles for men and
women. Our classic outdoor socks include the Hiking Light Crew
and Hiking Medium Crew for the outdoor and snow-sport consumer.
SmartWool continues to innovate with the introduction of their
new
PhD
tm
line of outdoor and on-snow performance socks with
WOWTECH
tm
knitting technique.
SmartWool has also expanded its apparel line through its Sport
NTS, a form-fitting performance base layer for the mountain
athlete. SmartWool also offers a complete line of performance
and lifestyle sweaters that reflects our mountain town heritage.
SmartWool
®
accessories include hats, gloves and infant wear.
SmartWool
®
products vaporize moisture, control temperature and odor and are
guaranteed not to shrink.
SmartWool
®
products are sold through independent retailers, better-grade
department stores, athletic stores and smartwool.com.
Howies
Limited
On December 1, 2006, we acquired Howies Limited, an active
sports apparel brand founded on the idea of designing and
manufacturing clothing for the inspired action sports and
outdoor consumer. Howies is located in Cardigan Bay, Wales, U.K.
Third-party
Licensing
Third-party licensing enables us to expand our brand reach to
appropriate and well-defined categories and to benefit from the
expertise of the licensees in a manner that reduces the risks to
us associated with pursuing these opportunities. We receive a
royalty on sales of our licensed products. We continue to focus
on improving our licensed products and distribution and to build
better integration across these products to present a seamless
brand worldwide. Our licensed
Timberland
®
products for men, women and children include all products other
than footwear. The accessories products include packs and travel
gear, watches, belts, wallets, socks, gloves, sunglasses,
eyewear and ophthalmic frames, and hats and caps, and are
designed, manufactured and distributed pursuant to licensing
agreements with third parties. We also license rights to
childrens apparel in the United States, Europe and Asia.
On February 7, 2007, we announced that beginning in Fall
2008 our
Timberland
®
brand apparel line will be offered in North America pursuant to
a licensing arrangement with Phillips-Van Heusen Corporation. In
addition, we reintroduced Timberland
PRO
®
apparel in the United States and Canada to complement our
successful Timberland
PRO
®
footwear business pursuant to a licensing arrangement. We
continue to offer Timberland
PRO
®
footwear and apparel in Europe under a license agreement.
7
Product
Sales: Business Segments and Operations by Geographic
Area
Our products are sold in the United States and internationally
primarily through independent retailers, better-grade department
stores, athletic stores and other national retailers, which
reinforce the high level of quality, performance and service
associated with Timberland. In addition, our products are sold
in
Timberland
®
specialty stores,
Timberland
®
factory outlet stores and
Timberland
®
footwear plus stores dedicated exclusively to selling
Timberland
®
products and
Timberland
®
sub-branded products, as well as through franchised retail
stores in Europe. We also sell our products in the United States
online at timberland.com and smartwool.com, and in the United
Kingdom online at timberlandonline.co.uk.
We operate in an industry, which includes the designing,
engineering, marketing and distribution of footwear and apparel
and accessories products for men, women and children. We manage
our business in the following three reportable segments, each
segment sharing similar product, distribution and marketing:
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. The
U.S. Wholesale segment also includes royalties from
licensed products sold worldwide, 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, factory outlet and footwear plus stores in the United
States as well as our
U.S. 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, including
e-commerce
in the United Kingdom, to sell footwear and apparel and
accessories), independent distributors and licensees.
The following table presents the percentage of our total revenue
generated by each of these reporting segments for the past three
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. Wholesale
|
|
|
35.5
|
%
|
|
|
41.3
|
%
|
|
|
42.6
|
%
|
U.S. Consumer Direct
|
|
|
13.3
|
%
|
|
|
12.6
|
%
|
|
|
13.6
|
%
|
International
|
|
|
51.2
|
%
|
|
|
46.1
|
%
|
|
|
43.8
|
%
|
More detailed information regarding these reportable segments,
and each of the geographic areas in which we operate, is set
forth in Note 16 to our consolidated financial statements,
entitled Business Segments and Geographic
Information, included in Item 8 of this Annual Report
on
Form 10-K.
U.S.
Wholesale
Our wholesale customer accounts within the United States include
independent retailers, better-grade department stores, outdoor
specialty stores, national athletic accounts, general sporting
goods retailers and other national accounts. Many of these
wholesale accounts merchandise our products in selling areas
dedicated exclusively to our products, or concept
shops. These concept shops display the breadth
of our product line and brand image to consumers, and are
serviced through a combination of field and corporate-based
sales teams responsible for these distribution channels. We also
service our wholesale accounts through our principal showroom in
New York City and regional showrooms in Atlanta, Georgia,
Dallas, Texas and Miami, Florida. We have continued our efforts
to expand the brand geographically by penetrating markets in
areas beyond our traditional strength in the Northeast U.S.
U.S.
Consumer Direct
On September 26, 2007 we announced our plan to close
approximately 40, principally larger, specialty stores in the
United States, Europe and Asia. This step is consistent with the
Companys strategy to open smaller, footwear-focused stores
in the United States. Most of the store closures will occur in
the United States and are expected to be completed in the first
half of 2008. The Company had closed 6 specialty stores under
this program in the United States by the end of 2007. The
Company also plans to close several underperforming
U.S. outlet stores.
8
At December 31, 2007, we operated 13 specialty stores, 63
factory outlet stores and 3 footwear plus stores in the United
States, but following store closures in the first half of 2008
we expect that there will be 1 specialty store, 56 factory
outlet stores and 4 to 8 footwear plus stores in the United
States. We also sell products through our internet stores
timberland.com and smartwool.com.
Timberland
®
Specialty Stores.
Most of these stores will be
closed as part of our store closure plan as we transition to
smaller, footwear focused stores, or footwear plus stores. These
larger specialty stores carried current season, first quality
merchandise, including footwear, apparel and accessories.
Timberland
®
Factory Outlet Stores.
These stores serve as a
primary channel for the sale of excess, damaged or discontinued
products from our specialty stores. Our factory outlet stores
also sell products specifically made for them. We view these
factory outlet stores as a way to preserve the integrity of the
Timberland
®
brand, while maximizing the return associated with the sale of
such products.
Timberland
®
Footwear Plus Stores.
This new store concept
began to be tested in the U.S. in 2007. These are smaller,
1,200 to 1,500 square feet stores that primarily sell our
most popular footwear products along with a smaller assortment
of our apparel products.
Timberland.com.
Our online store allows
U.S. consumers to purchase current season, first quality
merchandise over the internet. This internet site also provides
information about Timberland, including the reports we file with
or furnish to the Securities and Exchange Commission, investor
relations, corporate governance, community involvement
initiatives and employment opportunity information.
Additionally, the site serves to reinforce our marketing efforts.
International
We sell our products internationally through operating divisions
in the United Kingdom, Italy, France, Germany, Switzerland,
Spain, Japan, Hong Kong, Singapore, Taiwan, Malaysia and Canada.
Most of these operating divisions provide support for the sale
of our products to wholesale customers and operate
Timberland
®
specialty stores and factory outlet stores in their respective
countries. Certain of these stores will be closed in connection
with our global retail store review announced in 2007. At
December 31, 2007, we operated 132 company-owned
specialty stores and shops and 33 factory outlet stores in
Europe and Asia but following store closures in the first half
of 2008 we expect that there will be 108 company-owned
specialty stores and shops and 33 factory outlet stores in
Europe and Asia. One of our specialty stores in the United
Kingdom focuses solely on the marketing and sale of Timberland
Boot
Company
tm
products, which feature our line of work wear-inspired boots,
jeans and jackets targeting a younger consumer. In 2007, we
opened our first international online store in the United
Kingdom, www.timberlandonline.co.uk. We intend to continue
expanding the
Timberland
®
brand into new markets and consumer segments to support our goal
of becoming a top global brand.
Timberland
®
products are sold elsewhere in Europe, Asia, the Middle East,
Africa, Central America and South America by distributors,
franchisees and commissioned agents, some of which also may
operate
Timberland
®
specialty and factory outlet stores located in their respective
countries. We continued our expansion of the
Timberland
®
brand in China during 2007 through distributors and also began
selling in Russia during 2007 through distributors.
Distribution
We distribute our products through three Company-managed
distribution facilities which are located in Danville, Kentucky;
Ontario, California and Enschede, Holland and through
third-party managed distribution facilities which are located in
Asia.
Advertising
and Marketing
Timberlands mission is to equip people to make a
difference in their world. This is reflected in the way we
design, manufacture and market our products. Our marketing
programs and promotions are designed to increase consumer
awareness of and purchase intent for Timberland as a premium
brand that equips consumers
9
through the use of purposeful product. These programs and
promotions will be increasingly delivered throughout the year,
rather than only during select seasons as has historically been
the case.
In 2007, we continued to elevate our brand voice through the
Make it
better
tm
marketing campaign. This integrated communications platform
spanned print, outdoor, internet, and point-of-sale with an
overarching goal to inspire and engage our consumers through
brand, values and product communication. Under this brand
umbrella, we ran targeted advertising campaigns to our key
consumer segments.
|
|
|
|
|
To our Engager consumer, we ran an integrated TV, on-line and
out-of-home Rain campaign in 27 countries around the
world, including UK, Italy, France and Spain.
|
|
|
|
To our Youth consumer, we ran Re-imagine campaign
via out-of-home in key US cities, and National print in targeted
magazines.
|
|
|
|
To our Timberland PRO consumer, we ran
Measure-up
via targeted TV, print and out-of-home in the United States
|
In the spirit of our Make it
better
tm
campaign, we demonstrated our commitment to reducing our
environmental footprint through several consumer-facing
initiatives:
|
|
|
|
|
Rolled out a new retail store concept, first introduced in
London in 2006, designed with reclaimed, repurposed and recycled
materials. The new store design was developed to better
communicate our brand values of boot, brand and belief, as well
as provide a stronger platform to highlight our product and to
enhance seasonal story telling. Roll-out included the
introduction of a new smaller footprint footwear
plus format, developed to focus on core footwear line.
|
|
|
|
Launched a new line of
Earthkeepers
tm
products, featuring recycled, organic and renewable materials.
|
|
|
|
Ran a global Plant-one-on Us Earth Day and Holiday
retail promotion, whereby we planted a tree for every pair of
Timberland
®
boots sold during the promotion period.
|
Our marketing efforts were supported by distributor and licensee
funded marketing campaigns, developed in close concert with
Timberland to ensure consistent and effective brand presentation.
Seasonality
In 2007, as has been historically the case, our revenue was
higher in the last two quarters of the year than in the first
two quarters. Accordingly, the amount of fixed costs related to
our operations represented a larger percentage of revenue in the
first two quarters of 2007 than in the last two quarters of
2007. We expect this seasonality to continue in 2008.
Backlog
At December 31, 2007, our backlog of orders from our
customers was $305 million compared to $372 million at
December 31, 2006 and $381 million at
December 31, 2005. While all orders in the backlog are
subject to cancellation by customers, we expect that the
majority of such orders will be filled in 2008. We believe that
backlog at year-end is an imprecise indicator of total revenue
that may be achieved for the full year because backlog only
relates to wholesale orders for the next season, is affected by
the timing of customers orders and product availability
and excludes potential sales in our retail stores during the
year. The decline in backlog is primarily due to decreased
demand for boots and kids footwear, and a soft response to
apparel and accessories in an overall weak retail environment,
as we transition our apparel business to licensing arrangements.
10
Manufacturing
We operate a manufacturing facility in the Dominican Republic.
We manufacture four different construction footwear types for
both
Timberland
®
boots and shoes as well as our Timberland
PRO
®
series work shoes. We believe we benefit from our internal
manufacturing capability which provides us with sourcing for
fashion and core assortment, planning efficiencies and lead time
reduction, refined production techniques and favorable duty
rates and tax benefits. During 2007 and 2006, we manufactured
approximately 11% and 9%, respectively, of our footwear unit
volume in the Dominican Republic. We manufactured approximately
10% of our footwear unit volume during 2005 in Puerto Rico and
the Dominican Republic. The remainder of our footwear products
and all of our apparel and accessories products were produced by
independent manufacturers and licensees in Asia, Europe, Mexico,
Africa, and South and Central America. Approximately 89% of the
Companys 2007 footwear unit volume was produced in Asia by
independent manufacturers in China, Vietnam, Thailand, India and
Indonesia. Two of these manufacturers together produced
approximately 55% of the Companys 2007 footwear volume.
The Company continually evaluates footwear production sources in
other countries to maximize cost efficiencies and to keep pace
with advanced production techniques.
We maintain a product quality management group, which develops,
reviews and updates our quality and production standards. To
help ensure such standards are met, the group also conducts
product quality audits at our factories and distribution centers
and our independent manufacturers factories and
distribution centers. We have offices in Bangkok, Thailand; Zhu
Hai, China; Hong Kong; Istanbul, Turkey; Ho Chi Minh City,
Vietnam; and Chennai, India to supervise our sourcing activities
conducted in the Asia-Pacific region.
Materials
In 2007, eleven suppliers provided, in the aggregate,
approximately 82% of our leather purchases. Two of these
suppliers together provided approximately 29% of our leather
purchases in 2007. We historically have not experienced
significant difficulties in obtaining leather or other materials
in quantities sufficient for our operations. However, our gross
profit margins are adversely affected to the extent that the
selling prices of our products do not increase proportionately
with increases in the costs of leather and other materials. Any
significant, unanticipated increase or decrease in the prices of
these commodities could materially affect our results of
operations. We attempt to manage this risk, as we do with all
other footwear and non-footwear materials, on an ongoing basis
by monitoring related market prices, working with our suppliers
to achieve the maximum level of stability in their costs and
related pricing, seeking alternative supply sources when
necessary and passing increases in commodity costs to our
customers, to the maximum extent possible, when they occur. No
assurances can be given that such factors will protect us from
future changes in the prices for such materials.
In addition, we have established a central network of suppliers
through which our footwear manufacturing facilities and
independent footwear manufacturers can purchase materials. We
seek sources of materials local to manufacturers, in an effort
to reduce lead times while maintaining our high quality
standards. We believe that key strategic alliances with leading
materials vendors help reduce the cost and provide greater
consistency of materials procured to produce
Timberland
®
products and improve compliance with our production standards.
We continue to work to offset cost increases with cost savings
by utilizing new lower cost suppliers and consolidating existing
suppliers. However, during 2007 our cost savings efforts were
unable to offset increases in our raw materials costs which
increased due to rising oil prices. In 2007, we maintained
contracts with global vendors for hand-sewn thread, leather
laces, waterproof membrane gasket material, waterproof seam-seal
adhesives, topline reinforcement tape, packaging, laces, box
toes and counters, cellulose and nonwoven insole board,
Ströbel
®
construction insole materials and thread, synthetic suede lining
materials, soling components and compounds, and packaging labels.
11
Trademarks
and Trade Names; Patents; Research &
Development
Our principal trade name is The Timberland Company and our
principal trademarks are TIMBERLAND and the TREE DESIGN LOGO,
which have been registered in the United States and many foreign
countries. Other trademarks or registered trademarks of The
Timberland Company, or its affiliated companies, are: 24/7
Comfort Suspension, Air Raider, Amorphic Suspension, Balm
Proofer, Boot Sauce, B.S.F.P., Cast-Bond, ClimatePath, Coconut
Honeycomb Tech, Comforia, Earthkeepers, EasyDry, Endoskeleton,
Ergomorphic, Ever-Guard, Follow Your Path, Free to GoLite,
GoLite, Green Index, Gripstick, GSR, Howies, Independent
Suspension Network, IntraMet, IPATH, ISN, Isomorphic Suspension,
Jackson Mountain, Ladder Lock, Made To Work, Make it better,
Measure Up, Miōn, NEOform, Path of Service, PowerFit,
PreciseFit, PRO 24/7, PRO 24/7 Comfort Suspension, QuadCut,
Renewbuck, SafeGrip, Smart Comfort, SmartPrint, Leave my
SmartPrint, Smart Basket, SmartWool, Start Small, Think Big,
Splash Blaster, TBL, Timberland Boot Company, Timberland PRO,
TiTAN, Trail Grip, Weathergear, Waximum, and Whole Body
Stability.
We regard our trade name and trademarks as valuable assets and
believe that they are important factors in marketing our
products. We seek to protect and vigorously defend our trade
name and trademarks against infringement under the laws of the
United States and other countries. In addition, we seek to
protect and vigorously defend our patents, designs, copyrights
and all other proprietary rights under applicable laws.
We conduct research, design and development efforts for our
products, including field testing of a number of our products to
evaluate and improve product performance. Our Invention Factory,
an advanced concepts footwear team, continued its efforts in
2007 to develop future technologies for our footwear products.
We have also dedicated resources to an international design and
development team based in Europe. Our expenses relating to
research, design and development have not represented a material
expenditure relative to our other expenses.
12
Competition
Our footwear and apparel and accessories products are marketed
in highly competitive environments that are subject to changes
in consumer preference. Product quality, performance, design,
styling and pricing, as well as consumer awareness, are all
important elements of competition in the footwear and the
apparel and accessories markets served by us. Although the
footwear industry is fragmented to a great degree, many of our
competitors are larger and have substantially greater resources
than us, including athletic shoe companies, several of which
compete directly with some of our products. In addition, we face
competition from retailers that have established products under
private labels and from direct mail companies in the United
States. The competition from some of these competitors is
particularly strong where such competitors business is
focused on one or a few product categories or geographic regions
in which we also compete. However, we do not believe that any of
our principal competitors offers a complete line of products
that provides the same quality and performance as the complete
line of
Timberland
®
,
Timberland
PRO
®
,
SmartWool
®
,
Timberland Boot
Company
tm
,
Miōn
®
,
GoLite
®
,
Howies
®
,
and
IPATH
®
footwear and apparel and accessories products.
Environmental
Matters
Compliance with federal, state and local environmental
regulations has not had, nor is it expected to have, any
material effect on our capital expenditures, earnings or
competitive position based on information and circumstances
known to us at this time.
Employees
We had approximately 6,300 full and part-time employees
worldwide at December 31, 2007 and 2006. Reductions in
headcount associated with our Retail and Global Organization
restructurings in 2007 were offset by increases in our Dominican
Republic manufacturing facilities associated with a shift in
production to those facilities in 2007. Our management considers
our employee relations to be good. None of our employees are
represented by a labor union, and we have never suffered a
material interruption of business caused by labor disputes
involving our own employees.
Available
Information
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
exhibits and amendments to those reports that are filed with or
furnished to the Securities and Exchange Commission are made
available free of charge through our website www.timberland.com,
as soon as reasonably practicable after we electronically file
them with, or furnish them to, the Securities and Exchange
Commission. The charters for the Audit, Governance and
Nominating, Management Development and Compensation, and
Corporate Social Responsibility committees of our Board of
Directors as well as our Corporate Governance Principles and
Code of Ethics and other corporate information are available
free of charge through our website www.timberland.com. You may
request a copy of any of the above documents by writing to the
Secretary, The Timberland Company, 200 Domain Drive, Stratham,
New Hampshire 03885.
We submitted to the New York Stock Exchange in 2007 the CEO
certification required by Section 303A.12(a) of the New
York Stock Exchange Listed Company Manual.
13
Executive
Officers of the Registrant
The following table lists the names, ages and principal
occupations during the past five years of our executive
officers. All executive officers serve at the discretion of our
Companys Board of Directors.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Principal Occupation During the Past Five Years
|
|
Sidney W. Swartz
|
|
|
71
|
|
|
Chairman of the Board since June 1986; Chief Executive Officer
and President, June 1986 June 1998.
|
Jeffrey B. Swartz
|
|
|
47
|
|
|
President and Chief Executive Officer since June 1998. Jeffrey
Swartz is the son of Sidney Swartz.
|
Carden N. Welsh
|
|
|
54
|
|
|
Senior Vice President and Chief Administrative Officer since
August 2007; Treasurer of New Hampshire U.S. Congressional
Campaign, 2007; Advisory Board, The Trust for Public Land-New
Hampshire, 2006-2007; Masters studies at University of New
Hampshire, 2003-2006; Senior Vice President, International,
1998-2003.
|
Michael J. Harrison
|
|
|
47
|
|
|
Co-President,
Timberland
®
brand since December 2007; President Casual Gear,
February 2007 December 2007; Senior Vice
President Worldwide Sales and Marketing, February,
2006 February 2007; Senior Vice President and
General Manager International, November
2003 February 2006; Telos Partners Ltd: Consultant,
April 2001 October 2003.
|
Eugene R. McCarthy
|
|
|
51
|
|
|
Co-President,
Timberland
®
brand since December 2007; President Authentic
Youth, February 2007 December 2007; Group Vice
President Product and Design, April 2006
February 2007; Reebok International: Senior Vice President of
Product and Design, July 2003 November 2005; Nike
Inc.: marketing and sales positions for 21 years serving
most recently as its Global Director for Sales and Retail
Marketing for the
Jordan
®
brand.
|
John Crimmins
|
|
|
51
|
|
|
Chief Financial Officer since August 2007; Acting Chief
Financial Officer, March 2007 August 2007; Vice
President, Finance and Chief Accounting Officer since August
2002; Corporate Controller, August 2002 August 2007;
Interactiveprint: Chief Financial Officer,
July 1999 January 2002.
|
Danette Wineberg
|
|
|
61
|
|
|
Vice President and General Counsel since October 1997 and
Secretary since July 2001.
|
John P. Pazzani
|
|
|
44
|
|
|
Corporate Culture Officer since June 2007; Vice President, U.S.
Retail and Ecommerce, 2001 June 2007.
|
14
CAUTIONARY
STATEMENTS FOR PURPOSES
OF THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Timberland Company (the Company) wishes to take
advantage of The Private Securities Litigation Reform Act of
1995, which provides a safe harbor for
forward-looking statements to encourage companies to provide
prospective information. Prospective information is based on
managements then current expectations or forecasts. Such
information is subject to the risk that such expectations or
forecasts, or the assumptions used in making such expectations
or forecasts, may become inaccurate. The following discussion
identifies important factors that could affect the
Companys actual results and could cause such results to
differ materially from those contained in forward-looking
statements made by or on behalf of the Company. The Company
undertakes 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
operate in a highly competitive industry.
We market our products in highly competitive environments. Many
of our competitors are larger and have substantially greater
resources for marketing, research and development and other
purposes. These competitors include athletic and other footwear
companies, branded apparel companies and private labels
established by retailers. Furthermore, efforts by our footwear
competitors to dispose of their excess inventory could put
downward pressure on retail prices and could cause our wholesale
customers to redirect some of their purchases away from our
products.
Our
products may not appeal to consumers.
As we continue to market established products and develop new
products, our success depends in large part on our ability to
anticipate, understand and react to changing consumer demands.
We believe that our more fashion-focused boots, mens
apparel and womens footwear products are more susceptible
to changing fashion trends and consumer preferences than our
other products. Consumer demand for our boot products has
declined during the last three years as fashion trends have
favored lower profile, casual footwear. Revenue declines
associated with lower boot sales have adversely impacted our
financial results and no assurances can be made that sales of
our boot products will increase in the short-term or that we
will be able to develop or market alternative products to
mitigate the loss of such sales. Our products must appeal to a
broad range of consumers whose preferences cannot be predicted
with certainty and are subject to rapid change. The success of
our products and marketing strategy will also depend on a
favorable reception by our wholesale customers. We cannot ensure
that any existing products or brands will continue to be
successfully received by consumers or our wholesale customers.
We cannot ensure that any new products or brands that we
introduce will be successfully received by consumers or our
wholesale customers. Any failure on our part to anticipate,
identify and respond effectively to changing consumer demands
and fashion trends could adversely affect retail and consumer
acceptance of our products and leave us with unsold inventory or
missed opportunities. If that occurs, we may be forced to rely
on markdowns or promotional sales to dispose of excess,
slow-moving inventory, which may harm our business. At the same
time, our focus on tight management of inventory may result,
from time to time, in not having an adequate supply of products
to meet consumer demand and cause us to lose sales.
Our
inability to execute key strategic initiatives, including the
closure of targeted stores.
Over the last few months we have undertaken initiatives to
restructure our business operations to maximize operating
effectiveness and efficiency and to reduce costs. Achievement of
the targeted benefits depends in part on our ability to
appropriately identify, develop and effectively execute
strategies and
15
initiatives. We cannot be assured that we will achieve the
targeted benefits under these programs within a targeted
timeframe or within targeted costs or that the benefits, even if
achieved, will be adequate.
We
conduct business outside the United States which exposes us to
foreign currency, import restrictions, taxes, duties and other
risks.
We manufacture and source a majority of our products outside the
United States. Our products are sold in the U.S. and
internationally. Accordingly, we are subject to the risks of
doing business abroad, including, among other risks, foreign
currency exchange rate risks, import restrictions, anti-dumping
investigations, political or labor disturbances, expropriation
and acts of war. Additionally, as a global company, our
effective tax rate is highly dependent upon the geographic
composition of worldwide earnings and tax regulations governing
each region.
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,
were effective for a six month period and were 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 became
definitive on October 7, 2006, for a period of two years,
with a final 16.5% rate for China sourced footwear and a 10%
rate for Vietnam sourced footwear. Pursuant to European Union
regulations, only provisional duties which do not exceed the
definitive duty rates will be collected. Childrens
footwear with leather uppers was excluded from the provisional
duties, but is subject to definitive duties.
Although we pay for the purchase and manufacture of our products
primarily in U.S. dollars, we are routinely subject to
currency rate movements on
non-U.S. denominated
assets, liabilities and income as we sell goods in local
currencies through our foreign subsidiaries. No assurances can
be given that we will be protected from future changes in
foreign currency exchange rates that may impact our financial
condition or performance.
We
depend on independent manufacturers to produce the majority of
our products and our business could suffer if we need to replace
manufacturers or suppliers or find additional
capacity.
During 2007, we manufactured approximately 11% of our footwear
unit volume. Independent manufacturers and licensees in Asia,
Europe, Mexico, Africa and South and Central America produced
the remainder of our footwear products and all of our apparel
and accessories products. Independent manufacturers in China,
Vietnam, Thailand, India and Indonesia produced approximately
89% of our 2007 footwear unit volume. Two of these manufacturers
together produced approximately 55% of our 2007 footwear volume.
If we experience a significant increase in demand or a
manufacturer is unable to ship orders of our products in a
timely manner or to meet our quality standards, then we could
miss customer delivery date requirements for those items, which
could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could
have a material adverse effect on our financial condition and
results of operations. We compete with other companies for the
production capacity of our manufacturers and import quota
capacity. Any long-term economic downturn could cause our
suppliers to fail to make and ship orders placed by us. There is
no assurance that we will be able to maintain current
relationships with our current manufacturers or locate
additional manufacturers that can meet our requirements or
manufacture on terms that are acceptable to us.
The
loss of one or more of our major suppliers for materials may
interrupt our supplies.
We depend on a limited number of key sources for leather, our
principal material, and other proprietary materials used in our
products. In 2007, eleven suppliers provided, in the aggregate,
approximately 82% of our leather purchases. Two of these
suppliers provided approximately 29% of our leather purchases in
2007. While historically we have not experienced significant
difficulties in obtaining leather or other materials in
quantities sufficient for our operations, there have been
significant changes in the prices for these materials. Our gross
profit margins are adversely affected to the extent that the
selling prices of our products do not increase proportionately
with increases in the costs of leather and other materials. Any
significant unanticipated
16
increase or decrease in the prices of these commodities could
materially affect our results of operations. Increasing
oil-related product costs could also adversely impact gross
margins.
Our
business could be adversely impacted by any disruption to our
supply chain.
Independent manufacturers manufacture a majority of our products
outside of our principal sales markets, which requires us to
transport our products through third parties over large
geographic distances. Delays in the shipment or delivery of our
products due to the availability of transportation, work
stoppages or other factors could adversely impact our financial
performance.
Our
business could be adversely impacted by the financial
instability of our customers.
We sell our products to wholesale customers and extend credit
based on an evaluation of each customers financial
condition, usually without requiring collateral. The financial
difficulties of a customer could cause us to curtail doing
business with that customer. Our inability to collect from our
customers could have an adverse effect on our business or our
financial condition.
We
depend on sales forecasts which may not be accurate and may
result in higher infrastructure and product
investments.
We base our investments in infrastructure and product, in part,
on sales forecasts. We do business in highly competitive
markets, and our business is affected by a variety of factors,
including brand awareness, product innovations, retail market
conditions, economic and other factors, changing consumer
preferences, fashion trends, seasonality and weather conditions.
One of our principal challenges is to predict these factors to
enable us to match the production of our products with demand.
If sales forecasts are not achieved, these investments could
represent a higher percentage of revenue, and we may experience
higher inventory levels and associated carrying costs, all of
which could adversely affect our financial performance.
Declines
in revenue in our retail stores could adversely affect
profitability.
We have made significant capital investments in opening retail
stores and incur significant expenditures in operating these
stores. The higher level of fixed costs related to our retail
organization can adversely affect profitability, particularly in
the first half of the year, as our revenue historically has been
more heavily weighted to the second half of the year. Our
ability to recover the investment in and expenditures of our
retail organization can be adversely affected if sales at our
retail stores are lower than anticipated. Our gross margin could
be adversely affected if off-price sales increase as a
percentage of revenue. Due to poor financial performance at some
of our retail stores, primarily in the U.S., in late 2007 we
announced the closure of approximately 50 stores globally. As
discussed above, there can be no assurance that we will be able
to effectively implement this program or that anticipated
benefits will be achieved.
We
rely on our licensing partners to help us preserve the value of
our brand.
Since late 1994, we have entered into several licensing
agreements which enable us to expand our brand to product
categories and geographic territories in which we have not had
an appreciable presence. As previously announced, we have
licensed our North American
Timberland
®
apparel product line to Phillips-Van Heusen Corporation as we
believe they have the capabilities to help us maximize our brand
potential through an improved apparel offering and strengthened
distribution. The risks associated with our own products also
apply to our licensed products. There are also any number of
possible risks specific to a licensing partners business,
including, for example, risks associated with a particular
licensing partners ability to obtain capital, manage its
labor relations, maintain relationships with its suppliers,
manage its credit risk effectively and maintain relationships
with its customers. Although our license agreements prohibit
licensing partners from entering into licensing arrangements
with certain of our competitors, generally our licensing
partners are not precluded from offering, under other brands,
the types of products covered by their license agreements with
us. A substantial portion of sales of the licensed products by
our domestic licensing partners are also made to our largest
customers. While we have significant control over our licensing
partners products and advertising,
17
we rely on our licensing partners for, among other things,
operational and financial control over their businesses.
The
loss of key executives could cause our business to suffer, and
control by members of the Swartz family and the anti-takeover
effect of multiple classes of stock could discourage attempts to
acquire us.
Sidney W. Swartz, our Chairman, Jeffrey B. Swartz, our President
and Chief Executive Officer, and other executives have been key
to the success of our business to date. The loss or retirement
of these or other key executives could adversely affect us.
Sidney W. Swartz, Jeffrey B. Swartz and various trusts
established for the benefit of their families or for charitable
purposes, hold approximately 72% of the combined voting power of
our capital stock in the aggregate, enabling them to control our
affairs and to influence the election of the three directors
entitled to be elected by the holders of Class A common
stock voting separately as a class. Members of the Swartz family
will, unless they sell shares of Class B common stock that
would reduce the Class B common stock outstanding to 12.5%
or less of total Class A and Class B shares
outstanding, have the ability, by virtue of their stock
ownership, to prevent or cause a change in control of the
Company.
Our
charter documents and Delaware law may inhibit a change of
control that stockholders may consider favorable.
Under our Certificate of Incorporation, the Board of Directors
has the ability to issue and determine the terms of preferred
stock. The ability to issue preferred stock coupled with the
anti-takeover provisions of Delaware law could delay or prevent
a change of control or change in management that might provide
stockholders with a premium to the market price of their common
stock.
Our
inability to attract and retain qualified employees could impact
our business.
We compete for talented employees within our industry. We must
maintain competitive compensation packages to recruit and retain
qualified employees. Our failure to attract and retain qualified
employees could adversely affect the sales, design and
engineering of our products.
Our
ability to protect our trademarks and other intellectual
property rights may be limited.
We believe that our trademarks and other proprietary rights are
important to our success and our competitive position. We devote
substantial resources to the establishment and protection of our
trademarks on a worldwide basis. We cannot ensure that the
actions we have taken to establish and protect our trademarks
and other proprietary rights will be adequate to prevent
imitation of our products by others or to prevent others from
seeking to block sales of our products as a violation of the
trademarks and proprietary rights of others. Also, we cannot
ensure that others will not assert rights in, or ownership of,
trademarks and other proprietary rights of ours or that we will
be able to successfully resolve these types of conflicts to our
satisfaction. We are also susceptible to injury from parallel
trade and counterfeiting of our products. In addition, the laws
of certain foreign countries may not protect proprietary rights
to the same extent as do the laws of the United States.
The
value of our brand, and our sales, could be diminished if we are
associated with negative publicity.
While our staff and third-party compliance auditors periodically
visit and monitor the operations of our vendors, independent
manufacturers and licensees, we do not control these vendors or
independent manufacturers or their labor practices. A violation
of our vendor policies, labor laws or other laws by these
vendors or independent manufacturers could interrupt or
otherwise disrupt our sourcing or damage our brand image.
Negative publicity, for these or other reasons, regarding our
Company, brand or products, including licensed products, could
adversely affect our reputation and sales.
18
Risks
Related to Our Industry
We
face intense competition in the worldwide footwear and apparel
industry, which may impact our sales.
We face a variety of competitive challenges from other domestic
and foreign footwear and apparel producers, some of which may be
significantly larger and more diversified and have greater
financial and marketing resources than we have. We compete with
these companies primarily on the basis of anticipating and
responding to changing consumer demands in a timely manner,
maintaining favorable brand recognition, developing innovative,
high-quality products in sizes, colors and styles that appeal to
consumers, providing strong and effective marketing support,
creating an acceptable value proposition for retail customers,
ensuring product availability and optimizing supply chain
efficiencies with manufacturers and retailers, and obtaining
sufficient retail floor space and effective presentation of our
products at retail. Increased competition in the worldwide
footwear and apparel industries, including internet-based
competitors, could reduce our sales, prices and margins and
adversely affect our results of operations.
A
downturn in the economy may affect consumer purchases of
discretionary items and retail products, which could adversely
affect our sales.
The industries in which we operate are cyclical. Many factors
affect the level of consumer spending in the footwear and
apparel industries, including, among others, general business
conditions, interest rates, the availability of consumer credit,
weather, taxation and consumer confidence in future economic
conditions. Consumer purchases of discretionary items, including
our products, may decline during recessionary periods and also
may decline at other times when disposable income is lower. A
downturn in the economies in which we, or our licensing
partners, sell our products, whether in the United States or
abroad, may adversely affect our sales. Our gross margin could
also be adversely affected if off-price sales increase as a
percentage of revenue.
Retail
trends could result in downward pressure on our
prices.
With the growing trend toward retail trade consolidation, we
increasingly depend upon a reduced number of key retailers whose
bargaining strength is growing. Changes in the policies of these
retail trade customers, such as increased at-once ordering,
limitations on access to shelf space and other conditions may
result in lower net sales. Further consolidations in the retail
industry could result in price and other competition that could
damage our business.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We lease our worldwide headquarters located in Stratham, New
Hampshire. The lease for this property expires in September
2010, with the option to extend the term for two additional
five-year periods. We consider our headquarters facilities
adequate and suitable for our current needs.
We lease our manufacturing facilities located in Santiago,
Dominican Republic, under leasing arrangements, which expire on
various dates through 2009. We own our distribution facility in
Danville, Kentucky, and we lease our facilities in Ontario,
California and Enschede, Holland. The Company and its
subsidiaries lease all of their specialty and factory outlet
stores. Our subsidiaries also lease office and warehouse space
to meet their individual requirements.
Our headquarters, manufacturing facilities and
U.S. distribution facilities are included in Unallocated
Corporate for purposes of segment reporting. Our distribution
facility in Enschede is included in our International segment.
Specialty and factory outlet stores are included in both the
U.S. Consumer Direct and International segments, and office
and warehouse space is included in each of our segments.
19
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are involved in various litigation and legal matters that
have arisen in the ordinary course of business. We believe that
the ultimate resolution of any existing matter will not have a
material adverse effect on our consolidated financial statements.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
During the fourth quarter of the fiscal year ended
December 31, 2007, no matter was submitted to a vote of
security holders through the solicitation of proxies or
otherwise.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our Class A Common Stock is traded on the New York Stock
Exchange under the symbol TBL. There is no market for shares of
our Class B Common Stock; however, shares of Class B
Common Stock may be converted into shares of Class A Common
Stock on a one-for-one basis and will automatically be converted
upon any transfer (except for estate planning transfers and
transfers approved by the Board of Directors).
The following table presents the high and low closing sales
prices of our Class A Common Stock for the past two years,
as reported by the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
31.65
|
|
|
$
|
26.00
|
|
|
$
|
37.13
|
|
|
$
|
32.45
|
|
Second Quarter
|
|
|
27.60
|
|
|
|
25.19
|
|
|
|
35.01
|
|
|
|
26.10
|
|
Third Quarter
|
|
|
26.25
|
|
|
|
18.40
|
|
|
|
29.70
|
|
|
|
25.35
|
|
Fourth Quarter
|
|
|
20.22
|
|
|
|
15.05
|
|
|
|
33.37
|
|
|
|
28.24
|
|
As of February 22, 2008, the number of record holders of
our Class A Common Stock was 812 and the number of record
holders of our Class B Common Stock was 7. The closing
sales price of our Class A Common Stock on
February 22, 2008 was $14.68 per share.
We have never declared a dividend on either the Companys
Class A or Class B Common Stock. Our ability to pay
cash dividends is limited pursuant to loan agreements (see
Note 11 to the Companys consolidated financial
statements included in Item 8 of this Annual Report on
Form 10-K).
The Company has no plans to issue a cash dividend at this time.
20
Performance
Graph
The following graph shows the five year cumulative total return
of Class A Common Stock as compared with the
Standard & Poors (S&P) 500 Stock Index and
the weighted average of the S&P 500 Footwear Index and
the S&P 500 Apparel, Accessories and Luxury Goods
Index. The total return for the Footwear and Apparel,
Accessories and Luxury Goods indices is weighted in proportion
to the percent of the Companys revenue derived from sales
of footwear and from apparel and accessories (excluding
royalties on products sold by licensees), respectively, for each
year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002(1)
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
Timberland
|
|
|
|
100.00
|
|
|
|
|
146.22
|
|
|
|
|
175.99
|
|
|
|
|
182.81
|
|
|
|
|
177.37
|
|
|
|
|
101.54
|
|
S&P 500 Index
|
|
|
|
100.00
|
|
|
|
|
128.68
|
|
|
|
|
142.69
|
|
|
|
|
149.70
|
|
|
|
|
173.34
|
|
|
|
|
182.86
|
|
Weighted Average of S&P 500 Footwear Index and S&P 500
Apparel, Accessories & Luxury Goods Index
|
|
|
|
100.00
|
|
|
|
|
143.62
|
|
|
|
|
188.55
|
|
|
|
|
190.48
|
|
|
|
|
225.78
|
|
|
|
|
260.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Indexed to December 31, 2002
21
ISSUER
PURCHASES OF EQUITY SECURITIES(1)
For the
Three Fiscal Months Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
September 29 October 26
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,419,632
|
|
October 27 November 23
|
|
|
429,600
|
|
|
|
16.28
|
|
|
|
429,600
|
|
|
|
1,990,032
|
|
November 24 December 31
|
|
|
708,430
|
|
|
|
17.57
|
|
|
|
708,430
|
|
|
|
1,281,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 Total
|
|
|
1,138,030
|
|
|
$
|
17.08
|
|
|
|
1,138,030
|
|
|
|
|
|
Footnote(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved
|
|
|
|
|
Announcement
|
|
Program
|
|
Expiration
|
|
|
Date
|
|
Size (Shares)
|
|
Date
|
|
Program 1
|
|
|
02/09/2006
|
|
|
|
6,000,000
|
|
|
|
None
|
|
|
|
|
|
|
No existing programs expired or were terminated during the
reporting period. See Note 13 to our consolidated financial
statements, entitled Stockholders Equity, in
Item 8 of this Annual Report on
Form 10-K
for additional information.
|
|
*
|
|
Fiscal month
|
|
**
|
|
Based on trade date not settlement date
|
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected financial data should be read in
conjunction with our consolidated financial statements and
related notes, included in Item 8 of this Annual Report on
Form 10-K.
Selected
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2007
|
|
|
2006
(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
1,436,451
|
|
|
$
|
1,567,619
|
|
|
$
|
1,565,681
|
|
|
$
|
1,500,580
|
|
|
$
|
1,342,123
|
|
Net income
|
|
|
39,999
|
|
|
|
101,205
|
|
|
|
180,216
|
|
|
|
145,114
|
|
|
|
115,772
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.65
|
|
|
$
|
1.62
|
|
|
$
|
2.72
|
|
|
$
|
2.08
|
|
|
$
|
1.63
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
1.59
|
|
|
$
|
2.66
|
|
|
$
|
2.03
|
|
|
$
|
1.59
|
|
|
|
|
(1)
|
|
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards 123(R),
Share-Based
Payment
. See Note 14 to our consolidated financial
statements in Item 8 of this Annual Report on
Form 10-K.
|
Selected
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Cash and equivalents
|
|
$
|
143,274
|
|
|
$
|
181,698
|
|
|
$
|
213,163
|
|
|
$
|
309,116
|
|
|
$
|
241,803
|
|
Working capital
|
|
|
399,122
|
|
|
|
363,143
|
|
|
|
369,176
|
|
|
|
417,176
|
|
|
|
342,604
|
|
Total assets
|
|
|
836,345
|
|
|
|
860,377
|
|
|
|
790,699
|
|
|
|
751,642
|
|
|
|
641,716
|
|
Total long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
577,160
|
|
|
|
561,685
|
|
|
|
527,921
|
|
|
|
507,414
|
|
|
|
428,498
|
|
22
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discusses The Timberland Companys
(we, our, us,
its, Timberland or the
Company) results of operations and liquidity and
capital resources. The discussion, including known trends and
uncertainties identified by management, should be read in
conjunction with the consolidated financial statements and
related notes. Included herein with respect to 2007 versus 2006
comparisons are discussions and reconciliations of
(i) total Company, total International, Europe and Asia
revenue changes to constant dollar revenue changes; and
(ii) operating expense, operating income, net income and
diluted earnings per share (EPS) to operating
expense, operating income, net income and diluted EPS,
respectively, excluding restructuring and related costs. With
respect to 2006 versus 2005 comparisons, we include discussions
and reconciliations of (i) total Company, total
International, Europe and Asia revenue changes to constant
dollar revenue changes; and (ii) operating expense,
operating income, net income and diluted EPS to operating
expense, operating income, net income and diluted EPS,
respectively, excluding restructuring and related costs and
including share-based employee compensation costs related to
stock option and employee stock purchase plans as prescribed by
Statement of Financial Accounting Standards (SFAS)
123(R),
Share-Based Payment.
Constant dollar revenue changes, which exclude the impact of
changes in foreign exchange rates; operating expense, operating
income, net income and diluted EPS excluding restructuring and
related costs; and operating expense, operating income, net
income and diluted EPS excluding restructuring and related costs
and including share-based employee compensation costs related to
stock option and employee stock purchase plans are not Generally
Accepted Accounting Principle (GAAP) performance
measures. The difference between changes in reported revenue
(the most comparable GAAP measure) and constant dollar revenue
changes is the impact of foreign currency. We provide constant
dollar revenue changes for total Company, total International,
Europe and Asia results because we use the measure to understand
the underlying growth rate of revenue excluding the impact of
items that are not under managements direct control, such
as changes in foreign exchange rates. The limitation of this
measure is that it excludes items that have an impact on the
Companys revenue. This limitation is best addressed by
using constant dollar revenue changes in combination with the
GAAP numbers. We provide operating expense, operating income,
net income and diluted EPS excluding restructuring and related
costs because we use these measures to analyze the earnings of
the Company. Management believes these measures are a reasonable
reflection of the underlying earnings levels and trends from
core business activities, as well as more indicative of future
results. The difference between operating expense, operating
income, net income and diluted EPS excluding restructuring and
related costs and their most comparable GAAP measures (operating
expense, operating income, net income and diluted EPS) is the
impact of restructuring and related charges that may mask our
underlying operating results
and/or
business trends. The limitation of these measures is that they
exclude items that would otherwise increase the Companys
operating expenses and decrease the Companys operating
profit, net income and diluted EPS. These limitations are best
addressed by using them in combination with the most comparable
GAAP measures in order to better understand the amounts,
character and any impact of any increase or decrease on reported
results. We provide operating expense, operating income, net
income and diluted EPS excluding restructuring and related costs
and including share-based employee compensation costs related to
stock option and employee stock purchase plans because we use
these measures to analyze the earnings of the Company.
Management believes these measures are a reasonable reflection
of the underlying earnings levels and trends from core business
activities, are more indicative of future results, and provide
comparability to reported results that include share-based
employee compensation costs as prescribed by SFAS 123(R).
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
Timberland
®
brand.
23
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.
A summary of our 2007 financial performance, compared to 2006,
follows:
|
|
|
|
|
Revenue of $1,436.5 million was 8.4% lower in 2007 than
2006. Anticipated declines in boots and kids footwear as
well as decreases in
Timberland
®
apparel offset strong gains in
SmartWool
®
products and Timberland
PRO
®
series footwear.
|
|
|
|
Gross margin was 46.3% in 2007, compared to 47.5% in 2006,
primarily as a result of higher levels of off-price and close
out activity.
|
|
|
|
Operating expenses were $605.5 million in 2007 compared to
$581.5 million in 2006, including $24.7 million in
restructuring and related costs in 2007 and $3.9 million in
restructuring and related costs in 2006. Excluding restructuring
and related costs, operating expenses increased
$3.2 million, or 0.6%, as a result of higher selling
expenses partially offset by reduced general and administrative
costs.
|
|
|
|
Operating income for the year was $59.2 million, or 4.1% of
revenue, compared to $162.6 million, or 10.4% of revenue,
in 2006. Operating income excluding restructuring charges was
$83.8 million, or 5.8% of revenue, in 2007 compared to
$166.5 million, or 10.6% of revenue in 2006. Operating
income declined from 2006 to 2007 as a result of decreased
revenues and gross margin, as well as higher restructuring and
related costs in 2007.
|
|
|
|
Net income was $40.0 million in 2007 compared to
$101.2 million in 2006. Excluding restructuring charges,
net income was $56.5 million in 2007 compared to
$103.7 million in 2006.
|
|
|
|
Diluted earnings per share decreased from $1.59 in 2006 to $0.65
in 2007. Excluding restructuring charges, diluted earnings per
share decreased from $1.63 in 2006 to $0.92 in 2007.
|
|
|
|
Net cash provided by operating activities decreased from
$111.7 million in 2006 to $38.6 million in 2007
primarily as a result of reduced net income.
|
|
|
|
Cash at the end of 2007 was $143.3 million compared with
$181.7 million at December 31, 2006. There was no debt
outstanding at December 31, 2007 and 2006.
|
During 2007 we continued our focus on leadership, innovation and
community and were recognized for these efforts by vendors, as
Timberland
PRO
®
received the Total Company Large Vendor of the Year Award from
Tractor Supply Co.; by industry associations, as we were
recognized by the Outdoor Industry Association for our efforts
in creating the Green
Index
TM
rating system, and received the Visual Merchandising and Retail
Design Award in recognition of eco-friendly store design; and by
publications such as BusinessWeek, who named us winners of 2
International Design Excellence Awards (IDEA) for
GoLite
®
footwear and the Greenscapes Mountain Sneaker. We were also
named one of CRO Magazines 100 Best Corporate
Citizens; one of Working Mother Magazines Top
100 companies in the U.S. for working mothers; and
ranked #3 among the Top 100 Best Adoption-Friendly
Workplaces.
Restructuring
Programs
The Company incurred net restructuring and related charges of
$24.7 million in the year ended 2007. The components of
these charges are discussed below. See Note 18 to the
Companys consolidated financial statements in Item 8
of this Annual Report on
Form 10-K
for additional information with respect to these charges.
24
Global
Efficiency Review
As part of an ongoing initiative to rationalize our operating
expense structure, in the fourth quarter we undertook a review
of each function in our entire global organization and announced
plans to transition to a reorganized, more efficient
organization. This included changes to the U.S. sales team,
a streamlined global product development organization, and
reorganized support organizations around the globe. We incurred
a net restructuring charge of approximately $6.8 million in
the fourth quarter of 2007, primarily related to severance, of
which $3.1 million, $2.6 million and $1.1 million
were reported in the Unallocated Corporate, International, and
U.S. Wholesale segments, respectively.
Global
Retail Portfolio Review
During the third quarter of 2007, we announced our decision to
close approximately 40, principally larger, specialty retail
stores in the U.S., Europe and Asia. This action is consistent
with the Companys plan to continue to develop smaller,
footwear-focused stores in the U.S. and certain
international markets. The Company also plans to close several
underperforming U.S. outlet stores. For the year ended
December 31, 2007 the U.S. Consumer Direct segment
incurred $7.5 million in restructuring and related costs,
which included impairment charges related to property and
equipment of $3.9 million, $2.1 million for lease
termination costs, and severance and related costs for field
employees of $1.5 million. For the year ended
December 31, 2007 the International segment incurred
charges of $2.9 million, of which $1.9 million was an
impairment charge related to property and equipment and
$1.0 million was for severance and related costs for field
employees. We expect to incur additional charges of
$5.5 million, of which $2.1 million relate to our
U.S. Consumer Direct segment and $3.4 million relate
to our International segment, in the first half of 2008. These
expected costs primarily relate to lease termination costs.
North
American Apparel Licensing
During the first quarter of 2007, we entered into a five year
licensing agreement with Phillips-Van Heusen for the design,
sourcing and marketing of apparel in North America under the
Timberland
®
brand, beginning with the Fall 2008 line. We incurred a
restructuring charge of $3.1 million in our
U.S. Wholesale segment in the year ended December 31,
2007 to reflect employee severance, outplacement services and
asset disposal costs associated with the implementation of this
strategy.
Executive
Departure
During the first quarter of 2007, we also announced that Kenneth
P. Pucker, Executive Vice President and Chief Operating Officer
would be leaving the Company effective March 31, 2007.
Mr. Pucker entered into a separation agreement with the
Company, which provided for a cash payment and, pursuant to a
prior award agreement, the vesting of certain shares previously
awarded under the Companys incentive compensation plans.
In connection with our Global Reorganization discussed below,
the Company recorded a restructuring charge of approximately
$3.6 million in the first quarter of 2007 to record these
costs. Additionally, a credit of approximately $0.8 million
was recorded to restructuring associated with the forfeiture of
other shares awarded to Mr. Pucker but not vested upon
termination. See Note 14 to the Companys consolidated
financial statements in Item 8 of this Annual Report on
Form 10-K
for details of the impact of share-based awards included in this
restructuring charge. Of the total charge, $3.0 million was
a cash item that was paid in the second quarter of 2007. The
remaining $0.6 million charge and the $(0.8) million
credit were recorded as a net reduction to equity. The total net
charge of $2.8 million is reflected in our Unallocated
Corporate component for segment reporting.
Global
Reorganization
During the fourth quarter of 2006, the Company announced a
global reorganization to better align our organizational
structure with our key consumer categories. During the year
ended December 31, 2007 we incurred charges of
$1.6 million for severance and employment related items, of
which $1.4 million related to our International segment and
$0.2 million is in Unallocated Corporate.
25
Outlook
In February 2008 we announced we had taken several actions to
streamline our global operations which are expected to result in
incremental operating expense savings of $30 million. These
actions, when combined with our previously announced decisions
to license our U.S. apparel business, close underperforming
retail stores and reorganize our U.S. sales and global
product organizations, are expected to result in
$65 million of annual operating expense savings. The
Company plans to invest incrementally in consumer-facing
marketing spend, international expansion and other growth
initiatives resulting in a recalibrated operating expense base
for 2008 in the range of $550 million.
For 2008, we are targeting low-single digit revenue declines,
operating expenses in the range of $550 million and flat to
modest operating margin improvement excluding restructuring
costs, compared with 2007 comparable results. As defined, 2007
comparable results exclude $24.7 million in restructuring
and related costs, and approximately $30 million in
revenues associated with stores targeted for closure that
generated an operating loss of approximately $2 million.
The Company believes that actions taken to rationalize its
operating expense structure should offset continued soft market
trends. We anticipate our full year 2008 tax rate to be in the
range of 40%.
The Company continues to target mid-single digit revenue
declines and improved operating contribution excluding
restructuring costs for the first half of 2008, compared with
2007 first half comparable results. As defined, 2007 first half
comparable results exclude $7.5 million in restructuring
and related costs, and approximately $8 million in revenues
associated with stores targeted for closure that generated an
operating loss of approximately $2 million. We also
anticipate an additional $6 million in restructuring costs
to be incurred in the first half of 2008 for charges associated
with our retail closure plan and now believe total plan costs
will be in the range of $16 million, slightly below our
initial estimate.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related
disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to
sales returns and allowances, realization of outstanding
accounts receivable, the carrying value of inventories,
derivatives, other contingencies, impairment of assets,
incentive compensation accruals, shared-based compensation and
the provision for income taxes. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Historically, actual results have not been
materially different from our estimates. Because of the
uncertainty inherent in these matters, actual results could
differ from the estimates used in applying our critical
accounting policies. Our significant accounting policies are
described in Note 1 to the Companys consolidated
financial statements in Item 8 of this Annual Report on
Form 10-K.
We have identified the following as critical accounting
policies, based on the significant judgments and estimates used
in determining the amounts reported in our consolidated
financial statements:
Sales
Returns and Allowances
Our revenue consists of sales to wholesale customers (including
distributors, franchisees and commissioned agents), retail and
e-commerce
store revenues, license fees and royalties. We record wholesale
and
e-commerce
store revenues when title passes and the risks and rewards of
ownership have passed to our customer, based on the terms of
sale. Title passes generally upon shipment to or upon receipt by
our customer, depending on the country of sale and the agreement
with our 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 and royalty agreements.
26
We record reductions to revenue for estimated wholesale and
retail customer returns and allowances in the same period the
related sales are recorded. We base our estimates on historical
rates of customer returns and allowances, as well as the
specific identification of outstanding returns and allowances,
which are known to us but which have not yet been received. Our
total reserves for sales returns and allowances were
$30.0 million and $35.9 million at December 31,
2007 and 2006, respectively. The actual amount of customer
returns and allowances may differ from our estimates. If we
determine that increases or decreases to sales returns and
allowances are appropriate, we record either a reduction or an
increase in sales in the period in which we make such a
determination.
Allowance
for Doubtful Accounts
We make ongoing estimates for losses relating to our allowance
for uncollectible accounts receivable resulting from the
potential inability of our customers to make required payments.
We estimate potential losses primarily based upon our historical
rate of credit losses and our knowledge of the financial
condition of our customers. Our allowances for doubtful accounts
totaled $14.8 million and $12.5 million at
December 31, 2007 and 2006, respectively. Historically,
losses have been within our expectations. If the financial
condition of our customers were to change, adjustments may be
required to these estimates. If we determine that increases or
decreases to the allowance for doubtful accounts are
appropriate, we record either an increase or decrease to selling
expense in the period in which we make such a determination.
Inventory
Valuation
We value our inventory at the lower of cost
(first-in,
first-out) or market value. Market value is estimated based upon
assumptions made about future demand and retail market
conditions. If we determine that the estimated market value of
our inventory is less than the carrying value of the inventory,
we provide a reserve for the difference as a charge to cost of
sales. Our reserves related to inventory valuation totaled
$8.1 million and $9.9 million at December 31,
2007 and 2006, respectively. If actual market conditions are
more or less favorable than our estimates, adjustments to our
inventory reserves may be required. The adjustments would
decrease or increase our cost of sales in the period in which
they are recognized.
Derivatives
We are routinely subject to currency rate movements on
non-U.S. dollar
denominated assets, liabilities and cash flows as we purchase
and sell goods in foreign markets in their local currencies. We
use derivative instruments, specifically forward contracts, to
manage the impact of foreign currency fluctuations on a portion
of our forecasted foreign currency exposures. These derivatives
are carried at fair value on our consolidated balance sheet.
Changes in fair value of derivatives not designated as hedge
instruments are recorded in other income/(expense), net in our
consolidated statements of income (see Notes 1 and 3 to our
consolidated financial statements in Item 8 of this Annual
Report on
Form 10-K).
For our derivative contracts that have been designated as hedge
instruments, the effective portion of gains and losses resulting
from changes in the fair value of the instruments are deferred
in accumulated other comprehensive income and reclassified to
earnings in the period that the transaction that is subject to
the related hedge contract is recognized in earnings. The
ineffective portion of the hedge is reported in other
income/(expense), net in our consolidated statements of income.
We use our operating budget and forecasts to estimate future
economic exposure and to determine the levels and timing of
derivative transactions intended to mitigate such exposures in
accordance with our risk management policies. We closely monitor
our foreign currency exposure and adjust our derivative
positions accordingly. Our estimates of anticipated transactions
could fluctuate over time and could vary from the ultimate
transactions. Future operating results could be impacted by
adjustments to these estimates and changes in foreign currency
forward rates.
Contingencies
In the ordinary course of business, we are involved in legal
proceedings involving contractual and employment relationships,
product liabilities, trademark rights and a variety of other
matters. We record
27
contingent liabilities when it is probable that a liability has
been incurred and the amount of the loss is estimable. We
disclose a contingent liability when there is at least a
reasonable possibility that a loss has been incurred. Estimating
probable losses requires analysis and judgment about the
potential actions. Therefore, actual losses in any future period
are inherently uncertain. We do not believe that any pending
legal proceeding or claims will have a material impact on our
consolidated financial statements. However, if actual or
estimated probable future losses exceed our recorded liability,
we would record additional expense during the period in which
the loss or change in estimate occurred.
Long-lived
Assets
When events or circumstances indicate that the carrying value of
a long-lived asset may be impaired, we estimate the future
undiscounted cash flows to be derived from the asset to
determine whether or not a potential impairment exists. If the
carrying value exceeds the estimate of future undiscounted cash
flows, impairment is calculated as the excess of the carrying
value of the asset over the estimate of its fair market value.
We estimate future undiscounted cash flows using assumptions
about expected future operating performance. Those estimates of
undiscounted cash flows could differ from actual cash flows due
to, among other things, technological changes, economic
conditions or changes to business operations. For 2007, we
recorded impairment charges of $5.8 million associated with
the closure of certain of our retail stores. See Note 18 to
the Companys consolidated financial statements in
Item 8 of this Annual Report on
Form 10-K
for additional information regarding the Companys Global
Retail Portfolio Review. In 2006, no significant impairment
related to the carrying value of our long-lived assets was
recorded.
Incentive
Compensation Accruals
We use incentive compensation plans to link compensation to the
achievement of specific annual performance targets. We accrue
for this liability during each year based on certain estimates
and assumptions. The amount paid, based on actual performance,
could differ from our accrual.
Share-based
Compensation
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 14 to the Companys consolidated
financial statements in Item 8 of this Annual Report on
Form 10-K
for additional information regarding the Companys
share-based compensation.
Income
Taxes
We record deferred tax assets and liabilities based upon
temporary book to tax differences and to recognize tax
attributes, such as tax loss carryforwards and credits. The
carrying value of our net deferred tax assets assumes that we
will be able to generate sufficient future taxable income in
certain tax jurisdictions to realize the value of these assets.
If we were unable to generate sufficient future taxable income
in these jurisdictions, an adjustment could be required in the
net carrying value of the deferred tax assets, which would
result in additional income tax expense in our consolidated
statements of income. Management evaluates the realizability of
the deferred tax assets and assesses the need for any valuation
allowance quarterly.
We estimate the effective tax rate for the full fiscal year and
record a quarterly income tax provision in accordance with the
anticipated annual rate. As the fiscal year progresses, the
estimate is refined based upon actual events and earnings by
jurisdiction during the year. This continual estimation process
periodically results in a change to the expected effective tax
rate for the fiscal year. When this occurs, we adjust the
28
income tax provision during the quarter in which the change in
estimate occurs so that the year-to-date provision reflects the
expected annual rate.
Effective January 1, 2007 we adopted FASB Interpretation
No. 48 (FIN 48),
Accounting for
Uncertainty in Income Taxes an Interpretation of
FASB Statement No. 109
. Under FIN 48 we recognize
the impact of a tax position in our financial statements if that
position is more likely than not to be sustained upon
examination by the appropriate taxing authority, based on its
technical merits. As a result of the adoption of FIN 48, we
recognized a $3.3 million increase in our liability for
unrecognized tax benefits, which was recorded as a reduction to
the January 1, 2007 retained earnings balance. FIN 48
also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. Our accounting for income taxes in
connection with the adoption of FIN 48 is discussed in
Notes 1 and 12 to the Companys consolidated financial
statements included in Item 8 of this Annual Report on
Form 10-K.
The Company exercises its judgment in determining whether a
position meets the more likely than not threshold for
recognition, based on the individual facts and circumstances of
that position in light of all available evidence. In measuring
the FIN 48 liability, we consider amounts and probabilities
of outcomes that could be realized upon settlement with taxing
authorities using the facts, circumstances and information
available at the balance sheet date. These reflect the
Companys best estimates, but they involve inherent
uncertainties. As a result, if new information becomes
available, the Companys judgments and estimates may
change. A change in judgment relating to a tax position taken in
a prior annual period will be recognized as a discrete item in
the period in which the change occurs. A change in judgment
relating to a tax position taken in a prior interim period
within the same fiscal year will be reflected through our
effective tax rate.
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
1,436,451
|
|
|
|
100.0
|
%
|
|
$
|
1,567,619
|
|
|
|
100.0
|
%
|
|
$
|
1,565,681
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
664,728
|
|
|
|
46.3
|
|
|
|
744,173
|
|
|
|
47.5
|
|
|
|
774,511
|
|
|
|
49.5
|
|
Operating expense
|
|
|
605,549
|
|
|
|
42.2
|
|
|
|
581,537
|
|
|
|
37.1
|
|
|
|
534,410
|
|
|
|
34.1
|
|
Operating income
|
|
|
59,179
|
|
|
|
4.1
|
|
|
|
162,636
|
|
|
|
10.4
|
|
|
|
240,101
|
|
|
|
15.3
|
|
Interest income, net
|
|
|
835
|
|
|
|
0.1
|
|
|
|
966
|
|
|
|
0.1
|
|
|
|
3,335
|
|
|
|
0.2
|
|
Other income/(expense), net
|
|
|
(289
|
)
|
|
|
(-
|
)
|
|
|
(5,962
|
)
|
|
|
(0.4
|
)
|
|
|
23,551
|
|
|
|
1.5
|
|
Net income
|
|
$
|
39,999
|
|
|
|
2.8
|
|
|
$
|
101,205
|
|
|
|
6.5
|
|
|
$
|
180,216
|
|
|
|
11.5
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.65
|
|
|
|
|
|
|
$
|
1.62
|
|
|
|
|
|
|
$
|
2.72
|
|
|
|
|
|
Diluted
|
|
$
|
0.65
|
|
|
|
|
|
|
$
|
1.59
|
|
|
|
|
|
|
$
|
2.66
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
61,087
|
|
|
|
|
|
|
|
62,510
|
|
|
|
|
|
|
|
66,325
|
|
|
|
|
|
Diluted
|
|
|
61,659
|
|
|
|
|
|
|
|
63,690
|
|
|
|
|
|
|
|
67,744
|
|
|
|
|
|
2007
Compared to 2006
Revenue
Consolidated revenue for 2007 was $1,436.5 million, a
decrease of $131.2 million, or 8.4%, compared to 2006. On a
constant dollar basis, consolidated revenues were down 11.0%.
Anticipated declines in boots and kids footwear and
decreases in
Timberland
®
apparel offset strong gains in
SmartWool
®
products and Timberland
PRO
®
series footwear. U.S. revenue was $701.2 million, a
17.1% decline from 2006. International revenue was
$735.3 million, an increase of 1.8% over 2006. On a
constant dollar basis, International revenue decreased 3.9%,
with solid growth in Asia offset by a decline in Europe.
29
Segments
Review
We have three reportable business segments (see Note 16 to
the consolidated financial statements in Item 8 of this
Annual Report on
Form 10-K):
U.S. Wholesale, U.S. Consumer Direct and International.
U.S. Wholesale revenues were $509.8 million in 2007,
down 21.3% compared to 2006. The decrease was driven primarily
by anticipated declines in boots and kids footwear, and
decreases in
Timberland
®
apparel as we experienced soft retail demand for our apparel as
we transitioned our North American apparel business to a
licensing arrangement. This decrease was partially offset by
strong growth in
SmartWool
®
products and Timberland
PRO
®
series footwear, as well as the acquisition of IPATH.
U.S. Consumer Direct revenues decreased 3.2% to
$191.4 million from $197.7 million reported in 2006.
Lower retail sales of
Timberland
®
apparel, due to soft retail demand as we transitioned our North
American apparel business to a licensing arrangement, as well as
declines in boots and outdoor performance footwear offset
increases in casual footwear, kids footwear and
SmartWools
e-commerce
business. Comparable store sales declined 5.5% in a soft retail
environment. We had 13 specialty, 3 footwear plus, and 63 outlet
stores at December 31, 2007 compared to 20 specialty and 61
outlets stores at December 31, 2006. On September 26,
2007 we announced our plan to close approximately 40,
principally larger, specialty stores in the United States,
Europe and Asia. This step is consistent with the Companys
strategy to open smaller, footwear-focused stores in the United
States. The Company also plans to close several underperforming
U.S. outlet stores. The Company had closed 6 specialty
stores under this program by the end of 2007. We expect the
remaining closures to be completed in the first half of 2008,
and following the store closures we expect that there will be 1
specialty store, 56 factory outlet stores and 4 to 8 footwear
plus stores in the United States.
International revenues grew 1.8% to $735.3 million in 2007,
and accounted for 51.2% of consolidated revenues, but declined
3.9% in constant dollars, where growth in Asia and Canada was
offset by a decline in Europe. Europes revenue was
$539.2 million, flat with 2006, but a decline of 7.2% in
constant dollars. Growth in our European distributor business,
and gains in Scandinavia were offset by weak sales results
across Europe. Further revenue gains from the acquisitions of
Howies and IPATH, along with growth in casual and outdoor
performance footwear, were offset by an anticipated decline in
boots and kids footwear.
Asia recorded revenues of $155.5 million in 2007, up 7.4%,
or 6.5% in constant dollars, over 2006. Revenue increases are
attributed primarily to strong gains in our Asian distributor
business, reflecting our continued expansion in China.
Additional growth in Malaysia, Japan and Singapore was partially
offset by declines in Taiwan. Asias growth is supported by
sales gains in all product categories.
Canada grew 9.4% to $27.0 million. Gains in Timberland
PRO
®
,
SmartWool
®
apparel and accessories, and the benefit of foreign exchange
rate changes offset declines primarily in boots and kids
footwear.
Products
Worldwide footwear revenue was $1,004.8 million in 2007, a
decline of 10.8% as compared to 2006. Anticipated sales declines
in boots and kids along with lower sales of outdoor
performance footwear were partially offset by higher sales of
the Timberland
PRO
®
series and revenue associated with the acquisition of IPATH.
Unit sales were 10.9% lower than 2006, reflecting lower sales of
boots and kids footwear, while average selling prices
remained flat.
Worldwide apparel and accessories revenue was
$411.6 million in 2007, a decrease of 2.6% compared to
2006. This decrease reflects a decline in
Timberland
®
brand apparel sales worldwide, partially as a result of the
transition of our North American apparel business to a licensing
arrangement. This decrease was offset in part by double-digit
growth in
SmartWool
®
socks and apparel and the revenue associated with the
acquisition of Howies. Unit sales of apparel and accessories
increased 2.8%, while the average selling price decreased 5.2%.
Royalty and other revenue, which consists primarily of royalties
from third-party licensees and distributors, increased 9.7% to
$20.0 million, reflecting increased sales of licensed
Timberland PRO apparel, licensed kids apparel and growth
in our international distributor business.
30
Channels
Growth in our global consumer direct business was offset by
continued softness in worldwide wholesale revenue. Consumer
direct revenues grew 4.6% to $393.2 million, primarily due
to growth in Europe and Asia from door expansion. Globally,
comparable store sales were down 4.8% from 2006 to 2007. We had
243 Company owned stores, shops and outlets worldwide at the end
of 2007 compared to 246 at December 31, 2006. During 2007
we evaluated the performance of our worldwide retail stores and
announced we would close approximately 40, principally larger,
specialty retail stores in the United States, Europe and Asia.
The Company had closed 6 specialty stores in the United States
included in this plan by the end of 2007. This action is
consistent with the Companys strategy to transition to
smaller, footwear-focused stores in the U.S. and in certain
international markets. We also plan to close several
underperforming U.S. outlet stores. The majority of the
store closures are expected to occur in the first half of 2008,
and the reduction in door count is anticipated to increase
annual operating profits by approximately $2 million, while
lowering annual revenues by approximately $30 million. We
believe that retail is an important component of our
multi-channel distribution strategy and will continue to operate
approximately 200 retail doors globally following these select
closures. These company managed stores, when combined with over
600 stores and shops operated by franchise partners and
distributors, will leave the Company with more than 800
Timberland
®
retail locations worldwide following the closures.
Wholesale revenue was $1,043.2 million, a 12.5% decrease
compared to 2006. Wholesale revenue declines in the
U.S. and Europe were largely driven by sales declines in
boots and kids, declines in
Timberland
®
apparel and, to a lesser extent, decreases in casual and outdoor
performance footwear. These declines offset growth in Asia
primarily in boots and casual footwear, as well as strong growth
from SmartWool, Timberland
PRO
®
,
and revenue associated with the IPATH acquisition in the U.S.
Gross
Profit
Gross profit as a percentage of sales, or gross margin, was
46.3% compared to 47.5% in 2006. This decrease reflects impacts
from higher levels of off-price and close out activity; higher
comparable product costs, including effects from anti-dumping
duties on certain footwear imported into the EU; and mix
impacts, including lower sales of boots and kids footwear.
These impacts were partially offset by favorable foreign
exchange impacts.
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 $91.0 million and
$97.7 million in 2007 and 2006, respectively.
Operating
Expense
Total operating expense was $605.5 million in 2007,
$24.0 million, or 4.1% higher than in 2006. As a percentage
of revenue, operating expense was 42.2%, up 510 basis
points from the 37.1% reported in 2006. Operating expenses
included $24.7 million in restructuring and related charges
in 2007 and $3.9 million in 2006. An increase of
$12.4 million in selling expense was partially offset by a
decrease of $9.2 million in general and administrative
costs. Excluding restructuring and related costs in both 2007
and 2006, base operating expense increased $3.2 million, or
0.6%.
Selling expense for 2007 was $464.7 million, an increase of
$12.4 million or 2.8% compared to the prior year. The
increase was driven primarily by costs associated with
International retail expansion totaling $9.9 million and
new businesses and specialty category development of
$9.2 million, offset by decreases of $9.9 million in
global marketing costs primarily related to non-consumer facing
activities and share-based and incentive compensation costs of
$9.3 million. The impact of changes in foreign exchange
rates added approximately $13.3 million to selling expense.
We include the costs of physically managing inventory
(warehousing and handling costs) in selling expense. These costs
totaled $43.0 million and $38.2 million in 2007 and
2006, respectively.
31
Advertising expense, which is included in selling expense, was
$30.0 million and $28.1 million in 2007 and 2006,
respectively. Decreases in co-op advertising were offset by
increased media spending primarily related to our
Rain TV commercials and Earthkeepers product launch
in the fourth quarter of 2007. Advertising costs are expensed at
the time the advertising is run, predominantly in the season
that the advertising costs are incurred. As of December 31,
2007 and December 31, 2006, we had $0.1 million and
$0.7 million of prepaid advertising costs recorded on our
consolidated balance sheets, respectively.
General and administrative expense was $116.2 million, a
decrease of $9.2 million or 7.4% compared to 2006. The
decrease was driven primarily by a $9.4 million reduction
in share-based and incentive compensation costs and a
$7.8 million decrease in corporate administrative and
support costs, partially offset by $4.1 million associated
with International expansion and $3.3 million related to
new business initiatives. Foreign exchange rate changes added
approximately $2.1 million to overall general and
administrative expenses.
Restructuring and related costs totaled $24.7 million in
2007 compared to $3.9 million in 2006. New restructuring
initiatives in 2007 included $10.4 million associated with
a global retail portfolio review, $6.8 million associated
with a global efficiency review, $3.1 million associated
with our decision to license our North American apparel
business, and $4.4 million related to the global
reorganization begun in 2006. Restructuring charges in 2006 were
comprised of $3.0 million associated with the global
reorganization, $0.7 million to establish a European shared
service center and $0.2 million associated with the closure
of our Puerto Rico manufacturing facility at the end of 2005.
Operating
Income
Operating income was $59.2 million in 2007 compared to
$162.6 million in 2006. Operating income as a percentage of
revenue fell from 10.4% in 2006 to 4.1% in 2007, reflecting an
8.4% decrease in revenues, pressure on gross margins due to
increased off-price and close out activity, higher operating
expenses over a lower revenue base, and increased restructuring
and related charges.
Our U.S. Wholesale segments operating income
decreased 38.3% to $111.3 million in 2007, driven by
declines in both revenue and gross margin partially offset by a
decrease in operating expense. Revenue was down 21.3%, driven by
decreases in boots and kids footwear, as well as
Timberland
®
apparel. Gross margin fell 295 basis points, pressured
primarily by increased off-price sales of both footwear and
apparel. Operating expense decreased 5.4%, as lower non-consumer
facing marketing expenses, compensation costs, and a reduction
in bad debt expense as a result of a customers bankruptcy
which resulted in a non-recurring charge in 2006, were partially
offset by costs associated with new business initiatives and
restructuring charges of $3.1 million associated with our
decision to license our North American apparel business and
$1.1 million associated with the global efficiency review
we undertook in the fourth quarter of 2007.
Operating income for our U.S. Consumer Direct segment was
$9.5 million for 2007 compared to $16.6 million in
2006. Revenue decreased 3.2%, reflecting a 5.5% decline in
comparable store sales, while gross margin improved slightly, by
65 basis points. Operating expense increased 8.3%, driven
by $7.5 million of restructuring and related costs
associated with our Global Retail Portfolio Review.
International operating income was down 36.7% to
$92.5 million in 2007, driven by a 20.0% increase in
operating expense reflecting costs associated with International
retail expansion, an increase in our allowance for doubtful
accounts primarily associated with certain franchisees, new
business initiatives and the impact of foreign exchange rate
changes. Additionally, the International segment recorded
restructuring and related charges in 2007 associated with our
Global Retail Portfolio Review of $2.9 million, our global
efficiency review of $2.6 million and the global
reorganization we undertook beginning in 2006 of
$1.4 million. Additionally, gross margin was down
140 basis points, pressured by higher comparable product
costs, primarily the effects of EU anti-dumping duties, and
increased levels of close out activity and markdowns and
allowances, partially offset by favorable foreign exchange rate
impacts.
Our Unallocated Corporate operating loss decreased
$26.3 million, or 14.6%, to $154.1 million in 2007.
Unallocated Corporate operating loss as a percentage of total
revenue decreased 80 basis points to 10.7% of
32
total revenue. The primary drivers of this decrease in operating
loss were reduced costs associated with incentive and
share-based compensation, reductions in corporate and
administrative spending, and lower marketing support costs,
partially offset by an incremental $3.0 million in
restructuring charges in 2007, primarily related to an executive
departure.
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 $0.8 million and $1.0 million in 2007
and 2006, respectively. The decrease is primarily due to reduced
cash balances.
Other, net, included $0.5 million and $(8.4) million
of foreign exchange gains/(losses) for 2007 and 2006,
respectively, resulting from changes in the fair value of
financial derivatives not designated as hedges, specifically
forward contracts, and the timing of settlement of local
currency denominated assets and liabilities. These results were
driven by the volatility of exchange rates during the respective
reporting periods and should not be considered indicative of
expected future results.
The effective income tax rate was 33.0% in 2007, compared to
35.8% in 2006. This decrease reflects the release of a specific
tax reserve due to the closure of certain audits in the fourth
quarter of 2007 and the geographic mix of our profits. We expect
our full year effective tax rate in 2008 to be in the range of
40%. (See Note 12 to the consolidated financial statements
included in Item 8 of this Annual Report on
Form 10-K).
Reconciliation
of Total Company, Total International, Europe and Asia Revenue
Changes to Constant Dollar Revenue Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
$ Change
|
|
|
|
|
|
$ Change
|
|
|
|
|
|
|
(in Millions)
|
|
|
% Change
|
|
|
(in Millions)
|
|
|
% Change
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (decrease)/increase
|
|
$
|
(131.2
|
)
|
|
|
(8.4
|
)%
|
|
$
|
1.9
|
|
|
|
0.1
|
%
|
Increase due to foreign exchange rate changes
|
|
|
41.1
|
|
|
|
2.6
|
%
|
|
|
2.9
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue decrease in constant dollars
|
|
$
|
(172.3
|
)
|
|
|
(11.0
|
)%
|
|
$
|
(1.0
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue increase
|
|
$
|
13.2
|
|
|
|
1.8
|
%
|
|
$
|
36.0
|
|
|
|
5.2
|
%
|
Increase due to foreign exchange rate changes
|
|
|
41.1
|
|
|
|
5.7
|
%
|
|
|
2.9
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (decrease)/increase in constant dollars
|
|
$
|
(27.9
|
)
|
|
|
(3.9
|
)%
|
|
$
|
33.1
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (decrease)/increase
|
|
$
|
(0.6
|
)
|
|
|
(0.1
|
)%
|
|
$
|
13.3
|
|
|
|
2.5
|
%
|
Increase due to foreign exchange rate changes
|
|
|
38.2
|
|
|
|
7.1
|
%
|
|
|
4.2
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (decrease)/increase in constant dollars
|
|
$
|
(38.8
|
)
|
|
|
(7.2
|
)%
|
|
$
|
9.1
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue increase
|
|
$
|
10.7
|
|
|
|
7.4
|
%
|
|
$
|
12.0
|
|
|
|
9.0
|
%
|
Increase/(decrease) due to foreign exchange rate changes
|
|
|
1.4
|
|
|
|
0.9
|
%
|
|
|
(2.6
|
)
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue increase in constant dollars
|
|
$
|
9.3
|
|
|
|
6.5
|
%
|
|
$
|
14.6
|
|
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between changes in reported revenue (the most
comparable GAAP measure) and constant dollar revenue changes is
the impact of foreign currency. We provide constant dollar
revenue changes for total
33
Company, total International, Europe and Asia results because we
use the measure to understand the underlying growth rate of
revenue excluding the impact of items that are not under
managements direct control, such as changes in foreign
exchange rates.
Reconciliation
of Operating Expense to Operating Expense Excluding
Restructuring and Related Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
Dollars in Millions
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Operating expense, as reported
|
|
$
|
605.5
|
|
|
$
|
581.5
|
|
|
|
|
|
Deduct: Restructuring and related costs included in reported
operating expense
|
|
|
(24.6
|
)
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense excluding restructuring and related costs
|
|
$
|
580.9
|
|
|
$
|
577.6
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management provides operating expense excluding restructuring
and related costs because it is used to analyze the operating
expenses of the Company. Management believes this measure is a
reasonable reflection of the underlying expense levels and
trends from core business activities.
Reconciliation
of Operating Income to Operating Income Excluding Restructuring
and Related Costs
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Dollars in Millions
|
|
2007
|
|
|
2006
|
|
|
Operating income, as reported
|
|
$
|
59.2
|
|
|
$
|
162.6
|
|
Add: Restructuring and related costs included in reported
operating income
|
|
|
24.6
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
Operating income excluding restructuring and related costs
|
|
$
|
83.8
|
|
|
$
|
166.5
|
|
|
|
|
|
|
|
|
|
|
Management provides operating income excluding restructuring and
related costs because it is used to analyze the operating income
of the Company. Management believes this measure is a reasonable
reflection of the underlying income levels and trends from core
business activities.
Reconciliation
of Net Income to Net Income Excluding Restructuring and Related
Costs
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Dollars in Millions
|
|
2007
|
|
|
2006
|
|
|
Net income, as reported
|
|
$
|
40.0
|
|
|
$
|
101.2
|
|
Add: Restructuring and related costs included in reported net
income, net of related tax effect
|
|
|
16.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
Net income excluding restructuring and related costs
|
|
$
|
56.5
|
|
|
$
|
103.7
|
|
|
|
|
|
|
|
|
|
|
Management provides net income excluding restructuring and
related costs because it is used to analyze net income of the
Company. Management believes this measure is a reasonable
reflection of the underlying net income levels and trends from
core business activities.
Reconciliation
of Diluted EPS to Diluted EPS Excluding Restructuring and
Related Costs
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Diluted EPS, as reported
|
|
$
|
0.65
|
|
|
$
|
1.59
|
|
Per share impact of restructuring and related costs
|
|
|
0.27
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS excluding restructuring and related costs
|
|
$
|
0.92
|
|
|
$
|
1.63
|
|
|
|
|
|
|
|
|
|
|
34
Management provides diluted EPS excluding restructuring and
related costs because it is used to analyze the earnings of the
Company. Management believes this measure is a reasonable
reflection of the underlying earnings levels and trends from
core business activities.
2006
Compared to 2005
Revenue
Consolidated revenue of $1,567.6 million in 2006 was flat
when compared to 2005. Benefits from the addition of SmartWool,
which contributed an incremental $51.2 million to revenue
growth, solid growth in international markets and gains in
Timberland
PRO
®
footwear and
Timberland
®
brand apparel offset sales declines in boots and kids
footwear, primarily in the U.S.
Segments
Review
U.S. Wholesale revenues were $647.9 million in 2006,
down 2.9% compared to 2005. The decrease was driven primarily by
declines in boots and kids footwear. This decrease was
partially offset by a full year of sales from SmartWool, which
added $42.8 million in incremental revenue, and strong
growth in Timberland
PRO
®
footwear and
Timberland
®
brand apparel sales.
U.S. Consumer Direct revenues declined 7.0% to
$197.7 million in 2006. Comparable store sales declined
9.6%, reflecting both unseasonably warm weather trends which
pressured sales and our decision to remove classic boot product
from outlet stores in the second half of the year as part of our
strategy to strengthen overall pricing for these products in the
U.S. market. Strong growth in our
e-commerce
business, due primarily to incremental SmartWool sales,
partially offset the decrease in comparable store sales.
International revenues grew 5.2% to $722.1 million in 2006,
reflecting growth across Europe, Asia and Canada. Overall,
International revenues grew to 46.1% of consolidated revenues.
Europes revenue increased 2.5%, or 1.7% in constant
dollars, to $539.8 million. Growth in our European
distributor business, expansion in the key southern European
markets of Italy and Spain and gains in Scandinavia offset
softer sales results in France, Benelux and the U.K. Double
digit growth in mens and womens casual footwear and
solid gains in apparel and accessories were partially offset by
declines in boots and outdoor performance and kids
footwear.
Asia posted revenues of $144.8 million, up 9.0%, or 11.0%
in constant dollars, over 2005. Revenue increases were
attributed to strong gains in Japan; our Asian distributor
business, reflecting our continued expansion in China; and
Taiwan. Asias growth was supported by sales gains in all
product categories. We continued to expand our retail presence
in Asia, with a net addition of 14 stores and shops in 2006.
Canada expanded significantly over the prior year, growing 42.4%
to $24.6 million. Sales results reflect benefits from the
2006 reacquisition of distribution rights for apparel in Canada
and gains in accessories and Timberland
PRO
®
and womens casual footwear.
Products
Worldwide footwear revenue was $1,126.9 million, down 6.1%
from 2005. Footwear results were driven by a decline in boots
and kids footwear sales, partially offset by higher sales
of Timberland
PRO
®
and mens and womens casual footwear. Unit sales were
9.2% lower than 2005, reflecting lower sales of boots and
kids footwear. The average selling price increased 3.5% as
a result of business mix impacts reflecting growth in
international markets.
Worldwide apparel and accessories revenue was
$422.4 million in 2006, an increase of 21.1% compared to
2005. This increase reflects a full year of SmartWool sales,
which contributed an incremental $51.2 million in revenue,
as well as solid growth in
Timberland
®
brand apparel sales worldwide. Unit sales of apparel and
accessories increased 48.8%, while the average selling price
decreased 18.6%, reflecting impacts from the addition of
SmartWools products, which have lower average selling
prices.
35
Royalty and other revenue, which consists primarily of royalties
from third-party licensees and distributors, increased 9.2% to
$18.3 million, reflecting increased sales of licensed
kids apparel in the U.S. and growth in our
international distributor business.
Channels
Worldwide wholesale revenue growth offset the decline in our
global consumer direct business. Worldwide wholesale revenue was
$1,191.6 million, a 1.2% increase over 2005. Sales gains in
apparel and accessories, Timberland
PRO
®
footwear and mens and womens casual footwear offset
lower sales of boots and kids footwear. Global consumer
direct revenues were $376.0 million, 3.0% lower than 2005.
Worldwide comparable store sales declined 8.7%, reflecting
unseasonably warm weather trends that pressured retail sales in
the U.S. and Europe. This decrease more than offset
benefits from global door expansion and strong performance from
our
e-commerce
business. During 2006, we opened 35 stores, shops and outlets
and closed 12 worldwide.
Gross
Profit
Gross profit as a percentage of sales, or gross margin, was
47.5% in 2006, compared to 49.5% in 2005. This decrease reflects
impacts from product mix impacts, including lower sales of boots
and kids footwear; higher levels of off-price and
discounted sales; and higher comparable product costs, including
effects from anti-dumping duties on EU footwear, which added
$5.5 million to product costs in 2006.
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 $97.7 million and
$101.4 million in 2006 and 2005, respectively.
Operating
Expense
Total operating expense was $581.5 million in 2006,
$47.1 million, or 8.8% higher than in 2005. As a percentage
of revenue, operating expense was 37.1%, up 300 basis
points from the 34.1% reported in 2005. Excluding restructuring
and related costs in both 2006 and 2005, and including
share-based compensation costs in 2005, base operating expense
increased $35.0 million, or 6.5%, driven by
$26.4 million of incremental costs associated with new
businesses and category development, including the addition of
SmartWool, $18.2 million of cost growth related to
International expansion and $7.4 million of incremental
costs associated with share-based compensation, as a result of
new accounting requirements, offset by a $10.4 million
reduction in marketing expenses and a $9.3 million decline
in worldwide incentive compensation costs.
Selling expense for 2006 was $452.2 million, an increase of
$32.9 million or 7.8% compared to 2005. The increase was
driven by $21.5 million in costs related to new businesses
and category development, $18.2 million in International
business expansion and $5.1 million in share-based employee
compensation costs. These increases were partially offset by
decreases of $10.4 million in marketing costs and
$5.3 million in worldwide incentive compensation costs.
Foreign exchange rate changes had minimal impact on selling
expense growth.
We include the costs of physically managing inventory
(warehousing and handling costs) in selling expense. These costs
totaled $38.2 million and $37.8 million in 2006 and
2005, respectively.
Advertising expense, which is included in selling expense, was
$28.1 million and $36.6 million in 2006 and 2005,
respectively. The decrease reflects shifts in spending towards
other brand building activities such as investments in our
international business and retail expansion. Advertising costs
are expensed at the time the advertising is used, predominantly
in the season that the advertising costs are incurred. As of
December 31, 2006 and December 31, 2005, we had
$0.7 million and $1.2 million of prepaid advertising
costs recorded on our consolidated balance sheets, respectively.
General and administrative expense was $125.4 million, an
increase of $14.6 million or 13.2% over 2005. The increase
was driven by $4.9 million related to new business
initiatives, $2.3 million of share-based employee
compensation costs, $2.9 million in costs associated with
operating the new European finance shared
36
service center, $2.4 million in legal and compliance costs
and $0.5 million in certain insurance costs. These
increases were offset by a $4.0 million decline in
worldwide incentive compensation costs. Foreign exchange rate
changes added $2.2 million or 2.0% to overall general and
administrative expenses growth.
Operating
Income
Operating income was $162.6 million in 2006 compared to
$240.1 million in 2005. Operating income as a percentage of
revenue fell from 15.3% in 2005 to 10.4% in 2006, reflecting
pressure on gross margins as well as higher operating expenses
over a flat revenue base.
Our U.S. Wholesale segments operating income
decreased 16.2% to $180.2 million in 2006, driven by
declines in both revenue and gross margin and increased
operating expense. Revenue was down 2.9%, driven by decreases in
boots and kids footwear sales. Gross margin fell
130 basis points, pressured by negative product mix impacts
related to lower sales of boots and kids footwear and
increased off-price sales, partially offset by favorable impacts
from new businesses. Operating expense increased 22.6% primarily
due to the addition of SmartWool.
Operating income for our U.S. Consumer Direct segment was
$16.6 million for 2006 compared to $36.1 million in
2005. Revenue decreased 7.0%, reflecting a 9.6% decline in
comparable store sales. Gross margin was down 440 basis
points primarily due to lower U.S. outlet store margins,
reflecting higher levels of off-price and discounted sales and
negative product mix impacts related to lower boot sales.
Operating expense increased 5.7%, impacted by costs associated
with operating three additional stores in 2006.
International operating income was down 7.3% to
$146.2 million in 2006, driven by an 8.0% increase in
operating expense reflecting costs associated with International
expansion and costs related to operating the new European
finance shared service center. Additionally, gross margin was
down 185 basis points, pressured by higher comparable
product costs, including the effects of EU anti-dumping duties,
and increased levels of off-price sales.
Our Unallocated Corporate operating loss increased
$11.7 million, or 6.9%, to $180.4 million in 2006.
Unallocated Corporate operating loss as a percentage of total
revenue increased 70 basis points to 11.5% of total
revenue. Excluding restructuring costs in both 2006 and 2005 and
increased share-based employee compensation costs of
$9.4 million in 2006, Unallocated Corporate operating loss
increased $5.3 million or 3.2% from the prior year and
represents 10.8% of total revenue. This increase was driven
primarily by $5.1 million in unfavorable product cost
variances reflecting decreased volume and higher than planned
material costs, $2.1 million in global support services,
$1.2 million in product management expenses and
$1.0 million in one-time costs related to establishing the
new European finance shared service center, offset by a
$4.6 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 $1.0 million and $3.3 million in 2006
and 2005, respectively. The decrease was primarily due to
reduced cash balances resulting from our SmartWool acquisition,
share repurchases and reduced profitability.
Other, net, included $(8.4) million and $23.1 million
of foreign exchange gains/(losses) for 2006 and 2005,
respectively, resulting from changes in the fair value of
financial derivatives, specifically forward contracts, and the
timing of settlement of local currency denominated assets and
liabilities. These results were driven by the volatility of
exchange rates during the respective reporting periods and
should not be considered indicative of expected future results.
The effective income tax rate was 35.8% in 2006, compared to
32.5% in 2005 (see Note 12 to the consolidated financial
statements included in Item 8 of this Annual Report on
Form 10-K).
This increase reflects the geographic mix of our profits and
provisions for specific tax reserves.
37
Reconciliation
of Total Company, Total International, Europe and Asia Revenue
Changes to Constant Dollar Revenue Changes
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
$ Change
|
|
|
|
|
|
|
(in Millions)
|
|
|
% Change
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
Revenue increase
|
|
$
|
1.9
|
|
|
|
0.1
|
%
|
Increase due to foreign exchange rate changes
|
|
|
2.9
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
Revenue decrease in constant dollars
|
|
$
|
(1.0
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
|
|
|
|
|
|
Revenue increase
|
|
$
|
36.0
|
|
|
|
5.2
|
%
|
Increase due to foreign exchange rate changes
|
|
|
2.9
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
Revenue increase in constant dollars
|
|
$
|
33.1
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
Revenue increase
|
|
$
|
13.3
|
|
|
|
2.5
|
%
|
Increase due to foreign exchange rate changes
|
|
|
4.2
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
Revenue increase in constant dollars
|
|
$
|
9.1
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
Revenue increase
|
|
$
|
12.0
|
|
|
|
9.0
|
%
|
Decrease due to foreign exchange rate changes
|
|
|
(2.6
|
)
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
Revenue increase in constant dollars
|
|
$
|
14.6
|
|
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
The difference between changes in reported revenue (the most
comparable GAAP measure) and constant dollar revenue changes is
the impact of foreign currency. We provide constant dollar
revenue changes for total Company, total International, Europe
and Asia results because we use the measure to understand the
underlying growth rate of revenue excluding the impact of items
that are not under managements direct control, such as
changes in foreign exchange rates.
Reconciliation
of Operating Expense to Operating Expense Excluding
Restructuring and Related Costs and Including Share-Based
Employee Compensation Costs Related to Stock Option and Employee
Stock Purchase Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
Dollars in Millions
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Operating expense, as reported
|
|
$
|
581.5
|
|
|
$
|
534.4
|
|
|
|
|
|
Deduct: Restructuring and related costs included in reported
operating expense
|
|
|
(3.9
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense excluding restructuring and related costs
|
|
|
577.6
|
|
|
|
530.2
|
|
|
|
|
|
Deduct: Share-based employee compensation costs included in
reported operating expense
|
|
|
|
|
|
|
(10.2
|
)
|
|
|
|
|
Add: Total share-based employee compensation costs determined
under fair value based method for all awards
|
|
|
|
|
|
|
22.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense excluding restructuring and related costs and
including share-based employee compensation costs related to
stock option and employee stock purchase plans
|
|
$
|
577.6
|
|
|
$
|
542.7
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Management provides operating expense excluding restructuring
and related costs and including share-based employee
compensation costs related to stock option and employee stock
purchase plans because it is used to analyze the operating
expenses of the Company. Management believes this measure is a
reasonable reflection of the underlying expense levels and
trends from core business activities and provides comparability
to reported results that include share-based employee
compensation costs as prescribed by SFAS 123(R).
Reconciliation
of Operating Income to Operating Income Excluding Restructuring
and Related Costs and Including Share-Based Employee
Compensation Costs Related to Stock Option and Employee Stock
Purchase Plans
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Dollars in Millions
|
|
2006
|
|
|
2005
|
|
|
Operating income, as reported
|
|
$
|
162.6
|
|
|
$
|
240.1
|
|
Add: Restructuring and related costs included in reported
operating income
|
|
|
3.9
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
Operating income excluding restructuring and related costs
|
|
|
166.5
|
|
|
|
244.3
|
|
Add: Share-based employee compensation costs included in
reported operating income
|
|
|
|
|
|
|
10.2
|
|
Deduct: Total share-based employee compensation costs determined
under fair value based method for all awards
|
|
|
|
|
|
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
Operating income excluding restructuring and related costs and
including share-based employee compensation costs related to
stock option and employee stock purchase plans
|
|
$
|
166.5
|
|
|
$
|
231.8
|
|
|
|
|
|
|
|
|
|
|
Management provides operating income excluding restructuring and
related costs and including share-based employee compensation
costs related to stock option and employee stock purchase plans
because it is used to analyze the operating income of the
Company. Management believes this measure is a reasonable
reflection of the underlying income levels and trends from core
business activities and provides comparability to reported
results that include share-based employee compensation costs as
prescribed by SFAS 123(R).
Reconciliation
of Net Income to Net Income Excluding Restructuring and Related
Costs and Including Share-Based Employee Compensation Costs
Related to Stock Option and Employee Stock Purchase
Plans
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Dollars in Millions
|
|
2006
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
101.2
|
|
|
$
|
180.2
|
|
Add: Restructuring and related costs included in reported net
income, net of related tax effect
|
|
|
2.5
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
Net income excluding restructuring and related costs
|
|
|
103.7
|
|
|
|
183.0
|
|
Add: Share-based employee compensation costs included in
reported net income, net of related tax effect
|
|
|
|
|
|
|
6.9
|
|
Deduct: Total share-based employee compensation costs determined
under fair value based method for all awards, net of related tax
effect
|
|
|
|
|
|
|
(15.3
|
)
|
|
|
|
|
|
|
|
|
|
Net income excluding restructuring and related costs and
including share-based employee compensation costs related to
stock option and employee stock purchase plans
|
|
$
|
103.7
|
|
|
$
|
174.6
|
|
|
|
|
|
|
|
|
|
|
Management provides net income excluding restructuring and
related costs and including share-based employee compensation
costs related to stock option and employee stock purchase plans
because it is used to
39
analyze net income of the Company. Management believes this
measure is a reasonable reflection of the underlying net income
levels and trends from core business activities and provides
comparability to reported results that include share-based
employee compensation costs as prescribed by SFAS 123(R).
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 Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Diluted EPS, as reported
|
|
$
|
1.59
|
|
|
$
|
2.66
|
|
Per share impact of restructuring and related costs
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS excluding restructuring and related costs
|
|
|
1.63
|
|
|
|
2.70
|
|
Per share impact of share-based employee compensation costs
related to stock option and employee stock purchase plans
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Diluted EPS excluding restructuring and related costs and
including share-based employee compensation costs related to
stock option and employee stock purchase plans
|
|
$
|
1.63
|
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
|
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
because it is used to analyze the earnings of the Company.
Management believes this measure is a reasonable reflection of
the underlying earnings levels and trends from core business
activities and provides comparability to reported results that
include share-based employee compensation costs as prescribed by
SFAS 123(R).
Accounts
Receivable and Inventory
Accounts receivable were $188.1 million as of
December 31, 2007, compared to $204.0 million as of
December 31, 2006 and $168.8 million as of
December 31, 2005. Days sales outstanding were 38 days
as of both December 31, 2007 and 2006, and 33 days as
of December 31, 2005. Wholesale days sales outstanding were
49 days, 45 days and 39 days at the end of 2007,
2006 and 2005, respectively. Days sales outstanding were flat as
the increase in wholesale days outstanding were offset by an
increase in consumer direct revenue, as a percentage of total
revenue, for 2007. The increase in wholesale days outstanding is
primarily due to a higher international business mix in the
wholesale channel for 2007. The increase in 2006 accounts
receivable and days sales outstanding were driven by sales
timing and, to a lesser extent, some erosion in the timeliness
of collections.
Inventory increased 8.1% to $201.9 million as of
December 31, 2007 from $186.8 million as of
December 31, 2006 and $167.1 million as of
December 31, 2005. The increase in inventory for 2007
reflects increased costs, foreign exchange impacts, the addition
of new brands and slightly higher inventory levels associated
with soft market conditions. The increase in inventory in 2006
is primarily related to increased retail inventory in the
U.S. and Europe due to unseasonably warm weather and
investments made in Asian retail operations to prepare for the
Asian holiday season in January and February 2007.
Liquidity
and Capital Resources
2007
Compared to 2006
Net cash provided by operations for 2007 was $38.6 million,
compared with $111.7 million in 2006. The reduction in cash
provided in 2007 compared with 2006 was primarily due to reduced
profitability combined with an increase in cash used for working
capital. In 2007, our investment in working capital was
$55.9 million, compared to $40.8 million in 2006. The
increase in working capital investment was driven by lower
accounts receivable, resulting from reduced sales, and higher
inventory which was offset by a reduction in accounts payable
driven by the timing of shipments. Our cash provided by
operations was also negatively
40
impacted by reduced accruals and income taxes payable, which
resulted from lower profitability. These reductions in operating
cash were partially offset by reduced share-based compensation
and other non-cash charges as well as lower prepaid expenses.
Net cash used for investing activities amounted to
$44.4 million in 2007, compared with $47.4 million in
2006. Net cash used for investing activities in 2007 included
$12.8 million, net of cash acquired, primarily related to
the acquisition of the assets of IPATH, LLC. Net cash used for
investing activities in 2006 included $6.4 million, net of
cash acquired, primarily related to the acquisition of Howies
Limited and $4.4 million of other outflows related to our
acquisition of certain assets of GoLite LLC, including
trademarks. Capital expenditures in 2007 were
$30.5 million, compared to $36.6 million in 2006. The
decrease was primarily attributable to reduced investments in
retail stores and product tooling.
Net cash used for financing activities was $34.1 million in
2007, compared with $99.9 million in 2006. Cash flows from
financing activities reflected share repurchases of
$47.7 million in 2007, compared with $120.7 million in
2006. We received cash inflows of $12.6 million in 2007
from the issuance of common stock related to the exercise of
employee stock options and employee stock purchases, compared
with $16.4 million in 2006. An excess tax benefit from
share-based compensation provided $1.1 million in cash
flows in 2007 compared to $4.4 million in 2006.
2006
Compared to 2005
Net cash provided by operations for 2006 was
$111.7 million, compared with $182.3 million in 2005.
The reduction in cash provided in 2006 compared with 2005 was
primarily due to reduced net income and an increase in our
investment in working capital. In 2006, our net investment in
working capital was $40.8 million, compared to
$7.9 million in 2005. Working capital increases primarily
reflect higher quarter-end receivable balances, impacted by
sales timing and, to a lesser extent, some erosion in the
timeliness of collections in the U.S. and Europe, and
higher retail inventory levels related to warm weather in the
U.S. and Europe as well as Asian retail investment. Growth
in accounts receivable and inventory was partially offset by
increased payables. Our cash provided by operations was
positively impacted by increased accruals associated with the
timing of VAT and other expenses.
Net cash used for investing activities amounted to
$47.4 million in 2006, compared with $107.7 million in
2005. Net cash used for investing activities in 2006 included
$6.4 million, net of cash acquired, primarily related to
the acquisition of Howies Limited and $4.4 million of other
outflows related to our acquisition of certain assets of GoLite
LLC, including trademarks. Net cash used for investing
activities in 2005 included $81.3 million, net of cash
acquired, for the acquisition of SmartWool. Capital expenditures
in 2006 were $36.6 million, compared to $26.2 million
in 2005. The increase was primarily attributable to higher
investments in retail stores and product related investments.
Net cash used for financing activities was $99.9 million in
2006, compared with $160.6 million in 2005. Cash flows from
financing activities reflected share repurchases of
$120.7 million in 2006, compared with $181.5 million
in 2005. We received cash inflows of $16.4 million in 2006
from the issuance of common stock related to the exercise of
employee stock options and employee stock purchases, compared
with $20.8 million in 2005. An excess tax benefit from
share-based compensation provided $4.4 million in cash
inflows in 2006.
Credit
Facilities
We have an unsecured committed revolving credit agreement with a
group of banks which matures on June 2, 2011
(Agreement). The Agreement provides for
$200 million of committed borrowings, of which up to
$125 million may be used for letters of credit. 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 4.7% as of December 31, 2007), plus an
applicable margin of between 13.5 and 47.5 basis points
based on a fixed-charge coverage grid that is adjusted
quarterly. As of December 31, 2007, the applicable margin
under the facility was 47.5 basis points. We will pay a
utilization fee of an additional 5 basis points if our
outstanding borrowings under the
41
facility exceed $100 million. We also pay a commitment fee
of 6.5 to 15 basis points per annum on the total
commitment, based on a fixed-charge coverage grid that is
adjusted quarterly. As of December 31, 2007, the commitment
fee was 15 basis points. The Agreement places certain
limitations on additional debt, stock repurchases, acquisitions,
amount of dividends we may pay and certain other financial and
non-financial covenants. The primary financial covenants relate
to maintaining a minimum fixed charge coverage ratio of 2.25:1
and a maximum leverage ratio of 2:1. We measure compliance with
the financial and non-financial covenants and ratios as required
by the terms of the Agreement on a fiscal quarter basis.
We had uncommitted lines of credit available from certain banks
totaling $50 million as of December 31, 2007. Any
borrowings under these lines would be at prevailing money market
rates (approximately 5.3% as of December 31, 2007).
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 December 31, 2007 and 2006, we had no borrowings
outstanding under any of our credit facilities.
Management believes that our operating needs, capital needs and
our share repurchase program for 2008 will be funded through our
current cash balances, 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
cash from operations, without the need for additional permanent
financing. However, as discussed in Item 1A, Risk Factors,
of this Annual Report on
Form 10-K,
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. 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.
Aggregate
Contractual Obligations
At December 31, 2007, we have the following contractual
obligations due by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in millions)
|
|
|
Operating leases(1)
|
|
$
|
222.7
|
|
|
$
|
51.6
|
|
|
$
|
74.6
|
|
|
$
|
47.2
|
|
|
$
|
49.3
|
|
Purchase obligations(2)
|
|
|
201.9
|
|
|
|
201.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan(3)
|
|
|
9.1
|
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
0.6
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(4)
|
|
$
|
433.7
|
|
|
$
|
253.8
|
|
|
$
|
76.4
|
|
|
$
|
47.8
|
|
|
$
|
55.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
See Note 19 to the consolidated financial statements
included in Item 8 of this Annual Report on
Form 10-K.
|
|
(2)
|
|
Purchase obligations consist of open production purchase orders
for sourced footwear, apparel and accessories and materials used
to manufacture footwear and open purchase orders for operating
expense purchases relating to goods or services ordered in the
normal course of business.
|
|
(3)
|
|
Our deferred compensation plan liability was $9.1 million
at December 31, 2007. See Note 9 to the consolidated
financial statements included in Item 8 of this Annual
Report on
Form 10-K.
|
|
(4)
|
|
We had $22.3 million of gross liability for uncertain tax
positions recorded in other long-term liabilities on the
consolidated balance sheet at December 31, 2007. We are not
able to reasonably estimate in which future periods these
amounts will ultimately be settled. See Note 12 to the
consolidated financial statements included in Item 8 of
this Annual Report on
Form 10-K.
|
Off
Balance Sheet Arrangements
As of December 31, 2007, 2006 and 2005, we had letters of
credit outstanding of $24.5 million, $28.8 million and
$24.6 million respectively. These letters of credit were
issued predominantly for the
42
purchase of inventory. The decrease in letters of credit
outstanding in 2007 was driven by reduced purchases resulting
from lower sales.
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.
Quarterly
Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended
|
|
March 30
|
|
|
June 29
|
|
|
September 28
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
336,329
|
|
|
$
|
224,126
|
|
|
$
|
433,294
|
|
|
$
|
442,702
|
|
Gross profit
|
|
|
161,579
|
|
|
|
99,167
|
|
|
|
203,403
|
|
|
|
200,579
|
|
Net income/(loss)
|
|
|
9,253
|
|
|
|
(19,226
|
)
|
|
|
25,865
|
|
|
|
24,107
|
|
Basic earnings/(loss) per share
|
|
$
|
.15
|
|
|
$
|
(.31
|
)
|
|
$
|
.42
|
|
|
$
|
.40
|
|
Diluted earnings/(loss) per share
|
|
$
|
.15
|
|
|
$
|
(.31
|
)
|
|
$
|
.42
|
|
|
$
|
.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 29
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
349,811
|
|
|
$
|
226,605
|
|
|
$
|
502,980
|
|
|
$
|
488,223
|
|
Gross profit
|
|
|
173,930
|
|
|
|
102,751
|
|
|
|
239,829
|
|
|
|
227,663
|
|
Net income/(loss)
|
|
|
26,065
|
|
|
|
(16,622
|
)
|
|
|
55,551
|
|
|
|
36,211
|
|
Basic earnings/(loss) per share
|
|
$
|
.41
|
|
|
$
|
(.26
|
)
|
|
$
|
.89
|
|
|
$
|
.59
|
|
Diluted earnings/(loss) per share
|
|
$
|
.40
|
|
|
$
|
(.26
|
)
|
|
$
|
.88
|
|
|
$
|
.58
|
|
New
Accounting Pronouncements
A discussion of new accounting pronouncements is included in the
Summary of Significant Accounting Policies note (see
Note 1 to the consolidated financial statements included in
Item 8 of this Annual Report on
Form 10-K).
Forward-looking
Information
As discussed in Item 1A, Risk Factors, 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. Such statements are based on current
expectations only and actual future results may differ
materially from those expressed or implied by such
forward-looking statements due to certain risks, uncertainties
and assumptions. These risks, uncertainties and assumptions
include, but are not limited to:
|
|
|
|
|
Our ability to successfully market and sell our products in a
highly competitive industry and in view of changing consumer
trends, consumer acceptance of products, and other factors
affecting retail market conditions, including the current global
economic environment and global political uncertainties
resulting from the continuing war on terrorism;
|
|
|
|
Our ability to execute key strategic initiatives, including the
closure of targeted stores;
|
|
|
|
Our ability to adapt to potential changes in duty structures in
countries of import and export including anti-dumping measures
imposed by the European Union with respect to leather footwear
imported from China and Vietnam;
|
|
|
|
Our ability to locate and retain independent manufacturers to
produce lower cost, high-quality products with rapid turnaround
times;
|
|
|
|
Our ability to manage our foreign exchange rate risks;
|
|
|
|
Our reliance on a limited number of key suppliers;
|
43
|
|
|
|
|
Our ability to obtain adequate materials at competitive prices;
|
|
|
|
Our ability to successfully invest in our infrastructure and
product based upon advance sales forecasts;
|
|
|
|
Our ability to recover our investment in, and expenditures of,
our retail organization through adequate sales at such retail
locations; and
|
|
|
|
Our ability to respond to actions of our competitors, some of
whom have substantially greater resources than we have.
|
We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new
information, future events or otherwise.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, our financial position and
results of operations are routinely subject to a variety of
risks, including market risk associated with interest rate
movements on borrowings and investments and currency rate
movements on
non-U.S. dollar
denominated assets, liabilities and cash flows. We regularly
assess these risks and have established policies and business
practices that should mitigate a portion of the adverse effect
of these and other potential exposures.
We utilize cash from operations and U.S. dollar denominated
borrowings to fund our working capital and investment needs.
Short-term debt, if required, is used to meet working capital
requirements and long-term debt, if required, is generally used
to finance long-term investments. In addition, we use derivative
instruments to manage the impact of foreign currency
fluctuations on a portion of our foreign currency transactions.
These derivative instruments are viewed as risk management tools
and are not used for trading or speculative purposes. Cash
balances are invested in high-grade securities with terms less
than three months.
We have available unsecured committed and uncommitted lines of
credit as sources of financing for our working capital
requirements. Borrowings under these credit agreements bear
interest at variable rates based on either lenders cost of
funds, plus an applicable spread, or prevailing money market
rates. As of December 31, 2007, 2006 and 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 through a risk
management program that includes the use of derivative financial
instruments, primarily foreign currency forward contracts. These
derivative instruments are carried at fair value on our balance
sheet. Certain of these instruments, which related to 2007
exposures, do not qualify for hedge accounting and changes in
their fair value were recorded in other income/(expense). These
foreign currency forward contracts will expire in January 2008.
The Company has implemented a program that qualifies for hedge
accounting treatment to aid in mitigating our foreign currency
exposures and decrease the volatility of our earnings. We began
hedging the Companys 2008 foreign currency exposure under
this new hedging program in the third quarter of 2007. Under
this hedging program the Company performs a quarterly assessment
of the effectiveness of the hedge relationship and measures and
recognizes any hedge ineffectiveness in earnings. The foreign
currency forward contracts under this program will expire in
13 months or less. Based upon sensitivity analysis as of
December 31, 2007, a 10% change in foreign exchange rates
would cause the fair value of our financial instruments to
increase/decrease by approximately $17.1 million, compared
with an increase/decrease of $24.4 million as of
December 31, 2006. The decrease as of December 31,
2007, compared to December 31, 2006, is primarily related
to a reduction in our foreign currency denominated exposures as
of December 31, 2007 compared with December 31, 2006,
as well as our choice to hedge a lesser portion of our
forecasted 2008 exposure at December 31, 2007 than the
portion of our forecasted 2007 exposure that was hedged at
December 31, 2006, as determined in accordance with our
foreign exchange exposure management policy.
44
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The Timberland
Company
Stratham, New Hampshire
We have audited the accompanying consolidated balance sheets of
The Timberland Company and subsidiaries (the
Company) as of December 31, 2007 and 2006, and
the related consolidated statements of income, changes in
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedule listed in the
Index at Item 15 (a)(2). These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The
Timberland Company and subsidiaries at December 31, 2007
and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1, the Company adopted the provisions
of Financial Accounting Standards Board Interpretation
No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
,
effective January 1, 2007 and the provisions of Financial
Accounting Standards No. 123R,
Share-Based Payment
,
effective January 1, 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 29, 2008 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/S/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 29, 2008
45
The
Timberland Company
CONSOLIDATED
BALANCE SHEETS
As of December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
143,274
|
|
|
$
|
181,698
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of $14,762 in 2007 and $12,493 in 2006
|
|
|
188,091
|
|
|
|
204,016
|
|
Inventory, net
|
|
|
201,932
|
|
|
|
186,765
|
|
Prepaid expenses
|
|
|
41,572
|
|
|
|
42,130
|
|
Prepaid income taxes
|
|
|
17,361
|
|
|
|
12,353
|
|
Deferred income taxes
|
|
|
24,927
|
|
|
|
21,633
|
|
Derivative assets
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
617,157
|
|
|
|
648,771
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
87,919
|
|
|
|
94,640
|
|
Deferred income taxes
|
|
|
19,451
|
|
|
|
18,553
|
|
Goodwill
|
|
|
44,840
|
|
|
|
39,717
|
|
Intangible assets, net
|
|
|
54,382
|
|
|
|
47,865
|
|
Other assets, net
|
|
|
12,596
|
|
|
|
10,831
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
836,345
|
|
|
$
|
860,377
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
86,101
|
|
|
$
|
110,031
|
|
Accrued expense
|
|
|
|
|
|
|
|
|
Payroll and related
|
|
|
29,752
|
|
|
|
38,476
|
|
Other
|
|
|
79,151
|
|
|
|
84,258
|
|
Income taxes payable
|
|
|
19,215
|
|
|
|
49,938
|
|
Derivative liabilities
|
|
|
3,816
|
|
|
|
2,925
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
218,035
|
|
|
|
285,628
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
41,150
|
|
|
|
13,064
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred Stock, $.01 par value; 2,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Class A Common Stock, $.01 par value (1 vote per
share); 120,000,000 shares authorized;
73,393,951 shares issued at December 31, 2007 and
72,664,889 shares issued at December 31, 2006
|
|
|
734
|
|
|
|
727
|
|
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 December 31, 2007 and
December 31, 2006
|
|
|
117
|
|
|
|
117
|
|
Additional paid-in capital
|
|
|
251,063
|
|
|
|
224,611
|
|
Retained earnings
|
|
|
875,133
|
|
|
|
838,462
|
|
Accumulated other comprehensive income
|
|
|
20,106
|
|
|
|
15,330
|
|
Treasury Stock at cost; 25,024,194 Class A shares at
December 31, 2007 and 22,428,168 Class A shares at
December 31, 2006
|
|
|
(569,993
|
)
|
|
|
(517,562
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
577,160
|
|
|
|
561,685
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
836,345
|
|
|
$
|
860,377
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
The
Timberland Company
CONSOLIDATED
STATEMENTS OF INCOME
For the Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
1,436,451
|
|
|
$
|
1,567,619
|
|
|
$
|
1,565,681
|
|
Cost of goods sold
|
|
|
771,723
|
|
|
|
823,446
|
|
|
|
791,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
664,728
|
|
|
|
744,173
|
|
|
|
774,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
464,689
|
|
|
|
452,236
|
|
|
|
419,326
|
|
General and administrative
|
|
|
116,201
|
|
|
|
125,433
|
|
|
|
110,833
|
|
Restructuring and related costs
|
|
|
24,659
|
|
|
|
3,868
|
|
|
|
4,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
605,549
|
|
|
|
581,537
|
|
|
|
534,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
59,179
|
|
|
|
162,636
|
|
|
|
240,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
835
|
|
|
|
966
|
|
|
|
3,335
|
|
Other income/(expense), net
|
|
|
(289
|
)
|
|
|
(5,962
|
)
|
|
|
23,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income/(expense)
|
|
|
546
|
|
|
|
(4,996
|
)
|
|
|
26,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
59,725
|
|
|
|
157,640
|
|
|
|
266,987
|
|
Provision for income taxes
|
|
|
19,726
|
|
|
|
56,435
|
|
|
|
86,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,999
|
|
|
$
|
101,205
|
|
|
$
|
180,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.65
|
|
|
$
|
1.62
|
|
|
$
|
2.72
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
1.59
|
|
|
$
|
2.66
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
61,087
|
|
|
|
62,510
|
|
|
|
66,325
|
|
Diluted
|
|
|
61,659
|
|
|
|
63,690
|
|
|
|
67,744
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
The
Timberland Company
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income/(Loss)
|
|
|
Stock
|
|
|
Income
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, January 1, 2005
|
|
$
|
454
|
|
|
$
|
59
|
|
|
$
|
238,829
|
|
|
$
|
(18,517
|
)
|
|
$
|
859,059
|
|
|
$
|
19,407
|
|
|
$
|
(591,877
|
)
|
|
|
|
|
|
$
|
507,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance/conversion of shares of common stock
|
|
|
8
|
|
|
|
|
|
|
|
22,162
|
|
|
|
(11,636
|
)
|
|
|
|
|
|
|
|
|
|
|
10,682
|
|
|
|
|
|
|
|
21,216
|
|
Retirement of shares of common stock
|
|
|
(100
|
)
|
|
|
|
|
|
|
(53,565
|
)
|
|
|
|
|
|
|
(301,604
|
)
|
|
|
|
|
|
|
355,269
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,210
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181,739
|
)
|
|
|
|
|
|
|
(181,739
|
)
|
Tax benefit from stock option plans
|
|
|
|
|
|
|
|
|
|
|
7,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,057
|
|
2-for-1
stock split
|
|
|
356
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
(414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,216
|
|
|
|
|
|
|
|
|
|
|
$
|
180,216
|
|
|
|
180,216
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,453
|
)
|
|
|
|
|
|
|
(16,453
|
)
|
|
|
(16,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
718
|
|
|
|
117
|
|
|
|
214,483
|
|
|
|
(19,943
|
)
|
|
|
737,257
|
|
|
|
2,954
|
|
|
|
(407,665
|
)
|
|
|
|
|
|
|
527,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred
compensation
1
|
|
|
|
|
|
|
|
|
|
|
(19,943
|
)
|
|
|
19,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
|
|
|
9
|
|
|
|
|
|
|
|
6,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,553
|
|
|
|
|
|
|
|
16,404
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119,450
|
)
|
|
|
|
|
|
|
(119,450
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
18,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,918
|
|
Tax benefit from stock option plans
|
|
|
|
|
|
|
|
|
|
|
4,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,311
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,205
|
|
|
|
|
|
|
|
|
|
|
$
|
101,205
|
|
|
|
101,205
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,376
|
|
|
|
|
|
|
|
12,376
|
|
|
|
12,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
727
|
|
|
|
117
|
|
|
|
224,611
|
|
|
|
|
|
|
|
838,462
|
|
|
|
15,330
|
|
|
|
(517,562
|
)
|
|
|
|
|
|
|
561,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,328
|
)
|
Issuance of shares of common stock
|
|
|
7
|
|
|
|
|
|
|
|
13,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,103
|
|
Cancellation of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
4,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,371
|
)
|
|
|
|
|
|
|
(2,990
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,060
|
)
|
|
|
|
|
|
|
(45,060
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,969
|
|
Tax benefit from share-based compensation
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,999
|
|
|
|
|
|
|
|
|
|
|
$
|
39,999
|
|
|
|
39,999
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,401
|
|
|
|
|
|
|
|
8,401
|
|
|
|
8,401
|
|
Change in fair value of cash flow hedges, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,625
|
)
|
|
|
|
|
|
|
(3,625
|
)
|
|
|
(3,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
734
|
|
|
$
|
117
|
|
|
$
|
251,063
|
|
|
$
|
|
|
|
$
|
875,133
|
|
|
$
|
20,106
|
|
|
$
|
(569,993
|
)
|
|
|
|
|
|
$
|
577,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
|
|
1
|
|
The amount in deferred compensation
was reclassified to additional paid-in capital upon adoption of
Statement of Financial Accounting Standards (SFAS)
123(R), Share-Based Payment. See Note 14 for additional
information related to the Companys adoption of
SFAS 123(R).
|
48
The
Timberland Company
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,999
|
|
|
$
|
101,205
|
|
|
$
|
180,216
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,007
|
|
|
|
(11,207
|
)
|
|
|
(11,592
|
)
|
Share-based compensation
|
|
|
9,051
|
|
|
|
19,610
|
|
|
|
10,210
|
|
Depreciation and other amortization
|
|
|
31,307
|
|
|
|
27,885
|
|
|
|
24,475
|
|
Provision for losses on accounts receivable
|
|
|
7,406
|
|
|
|
5,661
|
|
|
|
801
|
|
Provision for asset impairment
|
|
|
5,817
|
|
|
|
|
|
|
|
|
|
Tax benefit/(expense) from share-based compensation, net of
excess benefit
|
|
|
(1,095
|
)
|
|
|
(95
|
)
|
|
|
7,057
|
|
Unrealized (gain)/loss on derivatives
|
|
|
(2,749
|
)
|
|
|
8,793
|
|
|
|
(21,091
|
)
|
Other non-cash charges
|
|
|
3,798
|
|
|
|
686
|
|
|
|
111
|
|
Increase/(decrease) in cash from changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
17,247
|
|
|
|
(32,953
|
)
|
|
|
(12,524
|
)
|
Inventory
|
|
|
(12,010
|
)
|
|
|
(16,315
|
)
|
|
|
(32,502
|
)
|
Prepaid expense
|
|
|
154
|
|
|
|
(6,395
|
)
|
|
|
(7,728
|
)
|
Accounts payable
|
|
|
(26,155
|
)
|
|
|
9,728
|
|
|
|
51,893
|
|
Accrued expense
|
|
|
(16,496
|
)
|
|
|
18,070
|
|
|
|
(22,250
|
)
|
Other liabilities
|
|
|
4,462
|
|
|
|
(3,013
|
)
|
|
|
2,340
|
|
Income taxes prepaid and payable, net
|
|
|
(23,135
|
)
|
|
|
(9,970
|
)
|
|
|
12,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
38,608
|
|
|
|
111,690
|
|
|
|
182,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired
|
|
|
(12,843
|
)
|
|
|
(6,381
|
)
|
|
|
(81,807
|
)
|
Additions to property, plant and equipment
|
|
|
(30,479
|
)
|
|
|
(36,590
|
)
|
|
|
(26,172
|
)
|
Other
|
|
|
(1,073
|
)
|
|
|
(4,409
|
)
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(44,395
|
)
|
|
|
(47,380
|
)
|
|
|
(107,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
(47,748
|
)
|
|
|
(120,719
|
)
|
|
|
(181,469
|
)
|
Issuance of common stock
|
|
|
12,574
|
|
|
|
16,407
|
|
|
|
20,838
|
|
Excess tax benefit from share-based compensation
|
|
|
1,101
|
|
|
|
4,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(34,073
|
)
|
|
|
(99,906
|
)
|
|
|
(160,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents
|
|
|
1,436
|
|
|
|
4,131
|
|
|
|
(9,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and equivalents
|
|
|
(38,424
|
)
|
|
|
(31,465
|
)
|
|
|
(95,953
|
)
|
Cash and equivalents at beginning of year
|
|
|
181,698
|
|
|
|
213,163
|
|
|
|
309,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year
|
|
$
|
143,274
|
|
|
$
|
181,698
|
|
|
$
|
213,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,564
|
|
|
$
|
1,569
|
|
|
$
|
374
|
|
Income taxes paid
|
|
$
|
40,453
|
|
|
$
|
73,341
|
|
|
$
|
78,259
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
The
Timberland Company
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
|
|
1.
|
Summary
of Significant Accounting Policies
|
Basis
of Consolidation
The consolidated financial statements include the accounts of
The Timberland Company and its subsidiaries (we,
our, us, Timberland or the
Company). All intercompany transactions have been
eliminated in consolidation.
Fiscal
Calendar
The Companys fiscal quarters end on the Friday closest to
the calendar quarter end, except that the fourth quarter and
fiscal year always end on December 31.
Nature
of Operations
We design, develop, engineer, market and distribute
premium-quality footwear, apparel and accessories products for
men, women and children. Our products are sold primarily through
independent retailers, better-grade department stores, athletic
stores and other national retailers that reinforce the high
level of quality, performance and service associated with
Timberland. In addition, our products are sold in
Timberland
®
specialty stores, in
Timberland
®
factory outlet stores, through
e-commerce
and through franchisees in Europe. Our products are sold
throughout the U.S., Canada, Europe, Asia, Latin America, South
Africa and the Middle East.
Our footwear, apparel and accessories products are marketed in
highly competitive environments that are subject to change in
consumer preferences. Footwear accounted for approximately 70%,
72% and 77% of our revenue in 2007, 2006 and 2005, respectively.
Geographically, 48%, 53% and 56% of our revenue was from our
domestic businesses in 2007, 2006 and 2005, respectively.
We manage our business in three major segments, each sharing
similar product, distribution and marketing:
U.S. Wholesale, U.S. Consumer Direct and International.
We sourced approximately 89%, 91% and 90% of our footwear
products from unrelated manufacturing vendors in 2007, 2006 and
2005, respectively. The remainder was produced in our
manufacturing facilities in the Dominican Republic in 2007 and
2006, and in the Dominican Republic and Puerto Rico in 2005. All
of our apparel and accessories products are sourced from
unrelated manufacturing vendors.
Use of
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results may differ
from these estimates. The significant estimates in the
consolidated financial statements include sales returns and
allowances, allowance for doubtful accounts receivable,
realizable value of inventory, derivatives, incentive
compensation accruals, share-based compensation, contingent
liabilities, impairment of long-lived assets and goodwill,
restructuring reserves and income taxes.
Revenue
Recognition
Our revenue consists of sales to wholesale customers (including
distributors, franchisees and commissioned agents), retail and
e-commerce
store revenues, license fees and royalties. We record wholesale
and
e-commerce
revenues when title passes and the risks and rewards of
ownership have passed to our customer, based on the terms of
sale. Title passes generally upon shipment to or upon receipt by
our customer, depending on the country of sale and the agreement
with our customer. Retail store revenues are recorded at
50
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the time of the sale. License fees and royalties are recognized
as earned per the terms of our licensing agreements.
Taxes collected from customers and remitted to governmental
authorities, such as sales, use and value added taxes, are
recorded on a net basis.
In 2007, 2006 and 2005 we recorded $3,349, $4,129 and $4,774 of
reimbursed shipping expenses within revenues and the related
shipping costs within selling expense, respectively. Shipping
costs are included in selling expense and were $17,847, $17,307
and $19,963 for 2007, 2006 and 2005, respectively.
We record reductions to revenue for estimated wholesale and
retail customer returns and allowances in the same period the
related sales are recorded. We base our estimates on historical
rates of customer returns and allowances, as well as the
specific identification of outstanding returns and allowances,
which are known to us but which have not yet been received or
paid. Our total reserves for sales returns and allowances were
$30,003 and $35,887 at December 31, 2007 and 2006,
respectively.
Allowance
for Doubtful Accounts
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. Our
allowances for doubtful accounts totaled $14,762 and $12,493 at
December 31, 2007 and 2006, respectively. More detailed
information regarding the provision for losses has been provided
within the statement of cash flows.
Advertising
Advertising costs are expensed at the time the advertising is
used, predominantly in the season that the advertising costs are
incurred. As of December 31, 2007 and December 31,
2006, we had $70 and $655 of prepaid advertising costs recorded
on our consolidated balance sheets, respectively. Advertising
expense, which is included in selling expense in our
consolidated income statement, was $29,960, $28,082 and $36,589
in 2007, 2006 and 2005, respectively.
Translation
of Foreign Currencies
Most of our subsidiaries have adopted their local currencies as
their functional currencies. We translate financial statements
denominated in foreign currencies by translating balance sheet
accounts at the end of period exchange rates and statement of
income accounts at the average exchange rates for the period.
Cumulative translation gains and losses are recorded in
accumulated other comprehensive income in stockholders
equity and changes in cumulative translation gains and losses
are reflected in accumulated other comprehensive income/(loss).
Realized gains and losses on transactions are reflected in net
income.
Cash
and Equivalents
Cash and equivalents consist of short-term, highly liquid
investments that have original maturities to the Company of
three months or less.
Inventory
Inventory is stated at the lower of cost
(first-in,
first-out) or market. Cost includes materials, labor, and
manufacturing overhead related to the purchase and production of
inventories. Market value is estimated based upon assumptions
made about future demand and retail market conditions. If we
determine that the actual market value differs from the carrying
value of our inventory, we make an adjustment to reduce the
value of
51
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
our inventory to its net realizable value. Our reserves related
to inventory valuation totaled $8,116 and $9,857 at
December 31, 2007 and 2006, respectively.
Derivatives
We are exposed to foreign currency exchange risk when we
purchase and sell goods in foreign currencies. It is our policy
and business practice to manage a portion of this risk through
forward purchases and sales of foreign currencies, thereby
locking in the future exchange rates. These derivative
instruments are viewed as risk management tools and are not used
for trading or speculative purposes. We use our operating budget
and forecasts to estimate our economic exposure and to determine
our hedging strategy.
Derivatives are recognized at fair value and included in either
derivative assets or derivative liabilities on our consolidated
balance sheets. Changes in fair value of derivatives not
designated or effective as hedges are recorded in other
income/(expense), net. The Company had no derivative instruments
that qualified for hedge accounting during the first two
quarters of 2007, and the years ended 2006 and 2005.
During the third quarter of 2007, the Company implemented a
program that qualifies for hedge accounting treatment to aid in
mitigating the Companys foreign currency exposures and to
decrease the volatility in earnings. The Company began hedging
its 2008 foreign currency exposure under this new hedging
program in the third quarter of 2007. Under this hedging program
the Company performs a quarterly assessment of the effectiveness
of the hedge relationship and measures and recognizes any hedge
ineffectiveness in earnings. The Companys hedging strategy
uses forward contracts as cash flow hedging instruments which
are recorded in the consolidated balance sheet at fair value.
The effective portion of gains and losses resulting from changes
in the fair value of these hedge instruments are deferred in
accumulated other comprehensive income and reclassified to
earnings in the period that the transaction that is subject to
the related hedge contract is recognized in earnings. Hedge
ineffectiveness is evaluated using the hypothetical derivative
method and the ineffective portion of the hedge is reported in
other income/(expense), net in the consolidated statement of
income.
Property,
Plant and Equipment
We record property, plant and equipment at cost. We provide for
depreciation using the straight-line method over the estimated
useful lives of the assets or over the terms of the related
leases, if such periods are shorter. The principal estimated
useful lives are 3 to 20 years for building and
improvements, 3 to 12 years for machinery and equipment and
3 years for lasts, patterns and dies.
Goodwill
Goodwill and intangible assets with indefinite lives are
evaluated for impairment at least annually (at the end of our
second fiscal quarter) or when events indicate that impairment
exists. No impairment of goodwill occurred in 2007, 2006 and
2005 (see Note 8).
Long-lived
Assets
We periodically evaluate the carrying values and estimated
useful lives of our long-lived assets, primarily property, plant
and equipment and finite-lived intangible assets. When factors
indicate that such assets should be evaluated for possible
impairment, we use estimates of undiscounted future cash flows
to determine whether the assets are recoverable. If the
undiscounted cash flows are insufficient to recover the carrying
value, an impairment is recognized.
52
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contingencies
In the ordinary course of business, we are involved in legal
proceedings involving contractual and employment relationships,
product liability claims, trademark rights and a variety of
other matters. We record contingent liabilities resulting from
claims when it is probable that a liability has been incurred
and the amount of the loss is reasonably estimable (see
Note 19).
Income
Taxes
Income taxes are determined based on the income reported on our
financial statements, regardless of when such taxes are payable.
Deferred tax assets and liabilities are adjusted to reflect the
changes in U.S. and applicable foreign income tax laws when
enacted.
On January 1, 2007 the Company adopted 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. Under
FIN 48, the Company recognizes the impact of a tax position
in its financial statements if that position is more likely than
not to be sustained upon examination by the appropriate taxing
authority, based on its technical merits.
We recognize interest expense on the amount of underpaid taxes
associated with our tax positions beginning in the first period
in which interest starts accruing under the tax law, and
continuing until the tax positions are settled. We classify
interest associated with underpayments of taxes as income tax
expense in our statement of income and in other long-term
liabilities on the balance sheet.
If a tax position taken does not meet the minimum statutory
threshold to avoid the payment of a penalty, an accrual for the
amount of the penalty that may be imposed under the tax law
would be recorded. Penalties, if incurred, would be classified
as income tax expense in our statement of income and in other
long-term liabilities on our balance sheet.
Earnings
Per Share (EPS)
Basic earnings per share excludes common stock equivalents and
is computed by dividing net income by the weighted-average
number of common shares outstanding for the periods presented.
Diluted earnings per share 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
years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
Per-
|
|
|
|
|
|
Weighted-
|
|
|
Per-
|
|
|
|
|
|
Weighted-
|
|
|
Per-
|
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
|
Net
|
|
|
Average
|
|
|
Share
|
|
December 31,
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic EPS
|
|
$
|
39,999
|
|
|
|
61,087
|
|
|
$
|
0.65
|
|
|
$
|
101,205
|
|
|
|
62,510
|
|
|
$
|
1.62
|
|
|
$
|
180,216
|
|
|
|
66,325
|
|
|
$
|
2.72
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and employee stock purchase plan shares
|
|
|
|
|
|
|
260
|
|
|
|
(
|
)
|
|
|
|
|
|
|
874
|
|
|
|
(.02
|
)
|
|
|
|
|
|
|
1,123
|
|
|
|
(.05
|
)
|
Nonvested shares
|
|
|
|
|
|
|
312
|
|
|
|
(
|
)
|
|
|
|
|
|
|
306
|
|
|
|
(.01
|
)
|
|
|
|
|
|
|
296
|
|
|
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
572
|
|
|
|
(
|
)
|
|
|
|
|
|
|
1,180
|
|
|
|
(.03
|
)
|
|
|
|
|
|
|
1,419
|
|
|
|
(.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
39,999
|
|
|
|
61,659
|
|
|
$
|
0.65
|
|
|
$
|
101,205
|
|
|
|
63,690
|
|
|
$
|
1.59
|
|
|
$
|
180,216
|
|
|
|
67,744
|
|
|
$
|
2.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following securities (in thousands) were outstanding as of
December 31, 2007, 2006 and 2005, but were not included in
the computation of diluted EPS because the options
exercise price was greater than the average market price of the
common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Options to purchase shares of common stock
|
|
|
3,778
|
|
|
|
2,560
|
|
|
|
722
|
|
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 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, 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. The Company estimates the fair
value of its stock option awards and employee stock purchase
plan rights on the date of grant using the Black-Scholes option
valuation model. See Note 14 for additional information
regarding the Companys adoption of SFAS 123(R).
In accordance with Financial Accounting Standards Board
(FASB) Staff Position FAS 123(R)-3,
Transition Election to Accounting for the Tax Effects of
Share-Based Payment Awards, in the fourth quarter of 2006
the Company elected to adopt the alternative transition method
for purposes of calculating the pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to
the adoption of SFAS 123(R).
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.
Comprehensive
Income
Comprehensive income is the combination of reported net income
and other comprehensive income/(loss), which is comprised of
foreign currency translation adjustments and changes in the fair
value of cash flow hedges.
The components of accumulated other comprehensive income/(loss)
as of December 31, 2007 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cumulative translation adjustment
|
|
$
|
23,731
|
|
|
$
|
15,330
|
|
Fair value of cash flow hedges, net of taxes of $191
|
|
|
(3,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,106
|
|
|
$
|
15,330
|
|
|
|
|
|
|
|
|
|
|
54
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) 157, Fair Value
Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP) and expands disclosures
about fair value measurements. SFAS 157 is effective for
the Company beginning January 1, 2008. The adoption of
SFAS 157 will not have a material impact on the
Companys consolidated financial statements.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
Including an amendment of FASB Statement 115, which
permits companies to choose to measure eligible financial
assets, financial liabilities and certain other assets and
liabilities at fair value on an
instrument-by-instrument
basis. The effect of adoption will be reported as a cumulative
effect adjustment to beginning retained earnings. SFAS 159
is effective for the Company beginning January 1, 2008. The
Company will not elect the fair value option for any of its
eligible financial instruments or other items.
In April 2007, the FASB issued FASB Staff Position
(FSP)
No. FIN 39-1,
Amendment of FASB Interpretation No. 39
(FIN 39-1).
FIN 39 specifies what conditions must be met for an entity
to have the right to offset assets and liabilities in the
balance sheet. This FSP replaces the terms in FIN 39 with
the term derivative instruments as defined under
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. FSP
No. FIN 39-1
is effective for fiscal years beginning after November 15,
2007, with the effect of adoption reported as a retrospective
change in accounting principle. The adoption of
FIN 39-1
will not have a material impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations. SFAS 141 was revised to
improve the relevance, representational faithfulness and
comparability of the information that a reporting entity
provides in its financial reports about a business combination
and its effects. It establishes principles and requirements for
how an acquirer: recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed
and any noncontrolling interest in the acquiree; recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
SFAS 141 (revised 2007) is applied prospectively, with
one exception for income taxes, and is effective for business
combinations made by the Company on or after January 1,
2009.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (ARB 51).
SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after
December 15, 2008, and earlier adoption is prohibited.
SFAS 160 shall be applied prospectively as of the beginning
of the fiscal year in which it is initially applied, except for
the presentation and disclosure requirements, which shall be
applied retrospectively for all periods presented. The Company
does not have any outstanding noncontrolling interests.
Inventory, net of valuation allowances, consists of the
following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
Materials
|
|
$
|
5,581
|
|
|
$
|
5,386
|
|
Work-in-process
|
|
|
933
|
|
|
|
1,333
|
|
Finished goods
|
|
|
195,418
|
|
|
|
180,046
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
201,932
|
|
|
$
|
186,765
|
|
|
|
|
|
|
|
|
|
|
55
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the normal course of business, the financial position and
results of operations of the Company are impacted by currency
rate movements in foreign currency denominated assets,
liabilities and cash flows as we purchase and sell goods in
local currencies. We have established policies and business
practices that are intended to mitigate a portion of the adverse
effect of these exposures. We use derivative financial
instruments, specifically forward contracts, to manage our
currency exposures. These derivative instruments are viewed as
risk management tools and are not used for trading or
speculative purposes.
Cash
Flow Hedges
The Company principally uses foreign currency forward contracts
as cash flow hedges to offset the effects of exchange rate
fluctuations on certain of its forecasted foreign currency
denominated sales transactions. The Companys cash flow
exposures include recognized and anticipated foreign currency
transactions, such as foreign currency denominated sales, costs,
expenses, inter-company charges, as well as collections and
payments. The risk in these exposures is the potential for
losses associated with the remeasurement of non-functional
currency cash flows into the functional currency. During the
quarter ended September 28, 2007, the Company developed a
program that qualifies for hedge accounting treatment to aid in
mitigating the Companys foreign currency exposures and to
decrease the volatility in earnings. The Company began hedging a
portion of its 2008 foreign currency cash flow exposure under
this new hedging program in the third quarter of 2007. Under
this hedging program the Company performs a quarterly assessment
of the effectiveness of the hedge relationship and measures and
recognizes any hedge ineffectiveness in earnings. The Company
tests effectiveness by determining whether changes in the cash
flow of the derivative offset, within a specified range, changes
in the cash flow of the hedged item. Regression analysis is
principally used by the Company to assess the effectiveness of a
hedge relationship.
The Companys hedging strategy uses forward contracts as
cash flow hedging instruments, which are recorded in the
consolidated balance sheet at fair value. The effective portion
of gains and losses resulting from changes in the fair value of
these hedge instruments are deferred in accumulated other
comprehensive income and reclassified to earnings, in cost of
goods sold, in the period that the transaction that is subject
to the related hedge contract is recognized in earnings. Hedge
ineffectiveness is evaluated using the hypothetical derivative
method and the ineffective portion of the hedge is reported in
the consolidated statement of income in other income/(expense),
net. The amount of hedge ineffectiveness for the year ended
December 31, 2007 was not material.
On December 31, 2007, we had $3,816 in derivative
liabilities on our consolidated balance sheet, which represent
the fair value of forward contracts with settlement dates
through January of 2009. At December 31, 2007 the Company
had approximately $3,625, net of $191 in taxes, of losses
related to the foreign currency cash flow hedges in accumulated
other comprehensive income. The Company expects to reclass
pre-tax losses of $3,816 from accumulated other comprehensive
income to the income statement within the next twelve months. No
amounts were reclassified from accumulated other comprehensive
income for the year ended December 31, 2007.
As of December 31, 2007, we had forward contracts maturing
at various dates through January 2009 to sell the equivalent of
$143,760 in foreign currencies at contracted rates. We had no
forward contracts designated as cash flow hedges as of
December 31, 2006.
Other
Derivative Contracts
Forward contracts related to the Companys foreign currency
exposure for 2007, 2006 and 2005 were not designated as hedging
instruments for accounting purposes. These forward contracts
were recorded at fair value with changes in the fair value of
these instruments recognized in earnings. For the years ended
56
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007, 2006 and 2005, the Company recorded in
other income/(expense), net, gains/(losses) on these outstanding
forward contracts of $(9,174), $(10,738) and $26,447,
respectively.
As of December 31, 2007, we had forward contracts maturing
at various dates through January 2008 to sell the equivalent of
$59,858 in foreign currencies at contracted rates and to buy the
equivalent of $36,715 in foreign currencies at contracted rates.
As of December 31, 2006, we had forward contracts maturing
at various dates through January 2008 to sell the equivalent of
$250,970 in foreign currencies and to buy the equivalent of
$7,863 in foreign currencies at contracted rates. The decrease
as of December 31, 2007, compared with December 31,
2006, is related to the development of our cash flow hedge
program in the third quarter of 2007.
|
|
4.
|
Financial
Instruments and Concentration of Credit Risk
|
The following table illustrates the U.S. dollar equivalent
of foreign exchange contracts at December 31, 2007 and 2006
along with maturity dates, and fair values. Fair values are
determined based on the difference between the settlement and
forward exchange rates. The contract amount represents the net
amount of all purchase and sale contracts of a foreign currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(U.S. $
|
|
|
Maturity
|
|
|
|
|
December 31, 2007
|
|
Equivalent)
|
|
|
Date
|
|
|
Fair Value
|
|
|
Pounds Sterling
|
|
$
|
1,447
|
|
|
|
2008
|
|
|
$
|
306
|
|
Pounds Sterling
|
|
|
4,408
|
|
|
|
2009
|
|
|
|
89
|
|
Euro
|
|
|
102,660
|
|
|
|
2008
|
|
|
|
(3,684
|
)
|
Euro
|
|
|
2,837
|
|
|
|
2009
|
|
|
|
(71
|
)
|
Japanese Yen
|
|
|
39,939
|
|
|
|
2008
|
|
|
|
(396
|
)
|
Japanese Yen
|
|
|
2,718
|
|
|
|
2009
|
|
|
|
(60
|
)
|
Canadian Dollar
|
|
|
12,894
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
166,903
|
|
|
|
|
|
|
$
|
(3,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(U.S. $
|
|
|
Maturity
|
|
|
|
|
December 31, 2006
|
|
Equivalent)
|
|
|
Date
|
|
|
Fair Value
|
|
|
Pounds Sterling
|
|
$
|
32,396
|
|
|
|
2007
|
|
|
$
|
(1,138
|
)
|
Pounds Sterling
|
|
|
17,840
|
|
|
|
2008
|
|
|
|
(325
|
)
|
Euro
|
|
|
118,907
|
|
|
|
2007
|
|
|
|
(1,875
|
)
|
Euro
|
|
|
23,883
|
|
|
|
2008
|
|
|
|
(295
|
)
|
Japanese Yen
|
|
|
33,743
|
|
|
|
2007
|
|
|
|
443
|
|
Japanese Yen
|
|
|
11,044
|
|
|
|
2008
|
|
|
|
322
|
|
Canadian Dollar
|
|
|
6,398
|
|
|
|
2007
|
|
|
|
|
|
New Zealand Dollar
|
|
|
(1,104
|
)
|
|
|
2007
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
243,107
|
|
|
|
|
|
|
$
|
(2,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments, which potentially subject us to
concentrations of credit risk, consist principally of temporary
cash investments, trade receivables and derivative instruments.
We place our temporary cash investments and derivative
instruments with a variety of high credit quality financial
institutions, thereby
57
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
minimizing exposure to concentration of credit risk. Credit risk
with respect to trade receivables is limited due to the large
number of customers included in our customer base.
|
|
5.
|
Fair
Value of Financial Instruments
|
The carrying amounts of cash and equivalents, accounts
receivable and accounts payable approximate their fair values
due to the short-term maturities of these assets and
liabilities. Derivative assets and derivative liabilities are
carried at fair value.
|
|
6.
|
Property,
Plant and Equipment
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
Land and improvements
|
|
$
|
501
|
|
|
$
|
501
|
|
Building and improvements
|
|
|
51,691
|
|
|
|
55,973
|
|
Machinery and equipment
|
|
|
174,714
|
|
|
|
171,222
|
|
Lasts, patterns and dies
|
|
|
37,337
|
|
|
|
34,220
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
264,243
|
|
|
|
261,916
|
|
Less: accumulated depreciation
|
|
|
(176,324
|
)
|
|
|
(167,276
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
87,919
|
|
|
$
|
94,640
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $28,272, $24,990 and $22,438 for the
years ended December 31, 2007, 2006 and 2005, respectively.
On April 25, 2007 we acquired substantially all of the
assets of IPATH, LLC, and put them into a newly formed
subsidiary, Ipath Footwear Inc. (Ipath). Ipath
designs, develops and markets skateboarding-inspired casual
footwear, apparel and accessories. Ipaths results are
reported in our U.S. Wholesale and International segments
from the date of acquisition. The purchase price was $12,588,
subject to adjustment, including transaction fees. The Company
has completed its final purchase price allocation related to the
fair value of Ipaths intangible assets, and, as of
December 31, 2007, the Company has recorded $330 for net
assets acquired, and allocated $4,570 of the purchase price to
the value of trademarks associated with the business, $2,600 to
customer related intangible assets, and $5,088 to goodwill.
Goodwill and intangible assets related to the Ipath acquisition
are recorded in our U.S. Wholesale and International
segments based on the expected level of benefit from the
acquisition to each of the reportable segments. The Company
expects the goodwill to be deductible for tax purposes.
On December 1, 2006, we acquired 100% of the stock of
Howies Limited (Howies), a private company
incorporated in England and Wales. Howies is based in Cardigan
Bay, Wales, and was founded in 1995. Howies is an active sports
brand founded on the idea of designing and manufacturing
clothing for the inspired action sports and outdoor customer.
Howies results of operations are included in our
International segment from the date of acquisition. The purchase
price consisted of an initial payment of $6,351, which includes
the retirement of debt at closing and transaction fees. Under
the agreement, additional consideration of up to $6,000, based
on current exchange rates, will be due based on the achievement
of certain net sales and earnings levels in each year from 2007
to 2010. Two selling shareholders of Howies, who are also
employees, are eligible to earn additional consideration based
on earnings levels for one annual period elected by the
shareholders beginning with 2011, provided they are employed
through 2011. We will estimate these potential payments
beginning in 2011. Pursuant to the final allocation of the
purchase price, which was completed in
58
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, as of December 31, 2007 the Company recorded $768 for
net assets acquired, and allocated $5,582 of the purchase price
to the value of trademarks associated with the business and $812
to customer related and other intangible assets. This allocation
reflects an increase of $1,136 in the value of trademarks, and
decreases of $141 to the value of customer and other related
intangibles and $184 to reduce goodwill to zero compared to the
preliminary allocation recorded as of December 31, 2006.
The excess of fair value over cost, as a result of contingent
consideration issuable under the arrangement, is recorded in
other long-term liabilities on our condensed consolidated
balance sheet. No contingent consideration is due with respect
to sales and earnings levels achieved in 2007.
On December 20, 2005, we acquired 100% of the stock of
SmartWool Corporation (SmartWool) for an aggregate
purchase price of $81,363, net of cash acquired. SmartWool,
based in Steamboat Springs, Colorado, designs, develops, markets
and distributes premium performance wool-based socks, apparel
and accessories for men, women and children. The acquisition was
intended to support our efforts to extend our enterprises
reach by offering our customers an expanded line of apparel and
accessories. SmartWools results of operations are
allocated among our business segments based on the geographic
location of their sales. Transaction costs related to this
acquisition totaled $390 of direct acquisition costs. We
accounted for the acquisition as a purchase, and accordingly, we
included the results of operations for SmartWool in our
operating results from the date of acquisition. We paid the
purchase price in cash from available funds.
The allocation of the purchase price as of December 31,
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
|
Amount
|
|
|
(In Years)
|
|
|
Assets and liabilities acquired, including cash
|
|
$
|
20,899
|
|
|
|
|
|
Trademarks
|
|
|
31,170
|
|
|
|
indefinite
|
|
Other intangible assets
|
|
|
5,380
|
|
|
|
1 to 6 years
|
|
Goodwill
|
|
|
24,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
82,390
|
|
|
|
|
|
Less: cash acquired
|
|
|
(1,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid
|
|
$
|
81,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not presented pro forma financial information for any of
the above noted acquisitions, as their historical operations
were not material to our consolidated financial statements.
|
|
8.
|
Goodwill
and Other Intangible Assets
|
Intangible assets consist of trademarks and other intangible
assets. Other intangible assets consist of customer, patent and
non-competition related intangible assets.
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
|
Trademarks (indefinite lives)
|
|
$
|
39,900
|
|
|
$
|
|
|
|
$
|
39,900
|
|
|
$
|
38,764
|
|
|
$
|
|
|
|
$
|
38,764
|
|
Trademarks (finite lives)
|
|
|
11,622
|
|
|
|
(4,543
|
)
|
|
|
7,079
|
|
|
|
7,541
|
|
|
|
(4,986
|
)
|
|
|
2,555
|
|
Other intangible assets (finite lives)
|
|
|
11,227
|
|
|
|
(3,824
|
)
|
|
|
7,403
|
|
|
|
8,637
|
|
|
|
(2,091
|
)
|
|
|
6,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,749
|
|
|
$
|
(8,367
|
)
|
|
$
|
54,382
|
|
|
$
|
54,942
|
|
|
$
|
(7,077
|
)
|
|
$
|
47,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We amortize intangible assets with finite useful lives assuming
no expected residual value. The weighted average amortization
period for all intangible assets subject to amortization was 8.3
and 5.3 years as of December 31, 2007 and 2006,
respectively. The weighted-average amortization period for
trademarks subject to amortization was 10.9 years and
5.0 years as of December 31, 2007 and 2006,
respectively. The weighted-average amortization period for other
intangible assets was 5.6 years as of both
December 31, 2007 and 2006. Amortization expense related to
all intangible assets was $3,101, $2,753 and $1,809 in 2007,
2006 and 2005, respectively. We estimate future amortization
expense from intangible assets held as of December 31, 2007
to be $2,756, $2,283, $1,874, $1,409 and $686 in 2008, 2009,
2010, 2011 and 2012, respectively. The increase in intangible
assets at December 31, 2007 is primarily the result of the
acquisition of Ipath and adjustments to the valuation of Howies
(see Note 7).
A summary of goodwill activity follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of year
|
|
$
|
39,717
|
|
|
$
|
39,503
|
|
Additions from acquisitions
|
|
|
5,088
|
|
|
|
184
|
|
Other adjustments
|
|
|
35
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
44,840
|
|
|
$
|
39,717
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Deferred
Compensation Plan
|
On January 1, 2001, we established an irrevocable
grantors trust to hold assets to fund benefit obligations
under the Companys Deferred Compensation Plan (the
Plan). Our obligations under the Plan consist of our
unsecured contractual commitment to deliver, at a future date,
any of the following: (i) deferred compensation credited to
an account under the Plan, (ii) additional amounts, if any,
that we may, from time to time, credit to the Plan, and
(iii) notional earnings on the foregoing amounts based upon
investment elections made by the participants. The obligations
are payable in cash upon retirement, termination of employment
and/or
at
certain other times in a lump-sum distribution or in
installments, as elected by the participant in accordance with
the Plan. The Plan assets, which reside in other assets, net on
our consolidated balance sheets, were $9,818 and $9,197 as of
December 31, 2007 and 2006, respectively. The securities
that comprise the Plan assets are corporate-owned life insurance
policies. These assets are subject to the claims of the general
creditors of the Company in the event of insolvency. Our
deferred compensation liability, which is included in other
long-term liabilities on our consolidated balance sheet, was
$9,110 and $10,107 as of December 31, 2007 and 2006,
respectively.
Section 409A of the Internal Revenue Code subjects amounts
deferred after December 31, 2004 to new rules governing
deferral elections and payment of deferred compensation. Final
regulations under Section 409A were issued in April 2007,
and under transition relief granted in October 2007, formal plan
amendments to comply with the new rules are required by
December 31, 2008. The transition relief delays full
operational and documentary compliance with the new rules until
January 1, 2009, and requires good faith operational
compliance in the interim.
60
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Other
Accrued Expenses
|
Other accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
Professional services and corporate expenses
|
|
$
|
32,435
|
|
|
$
|
36,100
|
|
Freight, duties and taxes
|
|
|
13,988
|
|
|
|
18,019
|
|
Marketing related expenses
|
|
|
6,717
|
|
|
|
10,501
|
|
Rent
|
|
|
9,662
|
|
|
|
7,680
|
|
Other accrued expenses
|
|
|
16,349
|
|
|
|
11,958
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,151
|
|
|
$
|
84,258
|
|
|
|
|
|
|
|
|
|
|
We have an unsecured committed revolving credit agreement with a
group of banks which matures on June 2, 2011
(Agreement). The Agreement provides for $200,000 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 4.7% as of December 31, 2007), plus an
applicable margin of between 13.5 and 47.5 basis points
based on a fixed charge coverage grid that is adjusted
quarterly. As of December 31, 2007, the applicable margin
under the facility was 47.5 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
also pay a commitment fee of 6.5 to 15 basis points per
annum on the total commitment, based on a fixed charge coverage
grid that is adjusted quarterly. As of December 31, 2007,
the commitment fee was 15 basis points. The Agreement
places certain limitations on additional debt, stock
repurchases, acquisitions, amount of dividends we may pay and
certain other financial and non-financial covenants. The primary
financial covenants relate to maintaining a minimum fixed charge
coverage ratio of 2.25:1 and a maximum leverage ratio of 2:1. We
measure compliance with the financial and non-financial
covenants and ratios as required by the terms of the Agreement
on a fiscal quarter basis.
We had uncommitted lines of credit available from certain banks
totaling $50,000 as of December 31, 2007. Any borrowings
under these lines would be at prevailing money market rates
(approximately 5.3% as of December 31, 2007). Further, we
had an uncommitted letter of credit facility of $80,000 to
support inventory purchases. These arrangements may be
terminated at any time at the option of the banks or the Company.
As of December 31, 2007 and 2006, we had no borrowings
outstanding under any of our credit facilities. For the years
ended December 31, 2007, 2006 and 2005, respectively,
$1,710, $1,699 and $601 in interest expense associated with
borrowings outstanding during the year was recorded in interest
income, net in the consolidated statements of income.
On January 1, 2007 the Company adopted FIN 48, which
clarifies the accounting for uncertainty in income tax
positions. Under FIN 48, the Company recognizes the impact
of a tax position in its financial statements if that position
is more likely than not to be sustained upon examination by the
appropriate taxing authority, based on its technical merits.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
As a result of the adoption of FIN 48, we recognized a
$3,328 increase in our liability for unrecognized tax benefits,
which was recorded as a reduction to the January 1, 2007
retained earnings balance. The
61
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
following table reconciles the total amount recorded for
unrecognized tax benefits for the year ended December 31,
2007:
|
|
|
|
|
Unrecognized tax benefits at January 1, 2007
|
|
$
|
22,384
|
|
Gross increases tax positions in prior period
|
|
|
1,832
|
|
Gross decreases tax positions in prior period
|
|
|
(7,151
|
)
|
Gross increases current-period tax positions
|
|
|
3,465
|
|
Settlements
|
|
|
(1,157
|
)
|
Lapse of statute of limitations
|
|
|
(327
|
)
|
|
|
|
|
|
Unrecognized tax benefits at December 31, 2007
|
|
$
|
19,046
|
|
|
|
|
|
|
As of December 31, 2007 we had a $22,328 total gross
liability for uncertain tax positions and accrued interest
included in other long-term liabilities on our balance sheet. Of
this amount, $17,319 represents the amount of unrecognized tax
benefits that, if recognized, would affect the Companys
effective tax rate.
We recognize interest expense on the amount of underpaid taxes
associated with our tax positions beginning in the first period
in which interest starts accruing under the tax law, and
continuing until the tax positions are settled. We classify
interest associated with underpayments of taxes as income tax
expense in our consolidated statement of income and in other
long-term liabilities on the consolidated balance sheet. The
gross amount of interest expense included in our income tax
provision was $1,650 for the year ended December 31, 2007.
The total amount of accrued interest included in other long-term
liabilities as of December 31, 2007 was $3,282.
If a tax position taken does not meet the minimum statutory
threshold to avoid the payment of a penalty, an accrual for the
amount of the penalty that may be imposed under the tax law
would be recorded. Penalties, if incurred, would be classified
as income tax expense in our consolidated statement of income
and in other long-term tax liabilities on our consolidated
balance sheet. There were no penalties included in our income
tax provision or accrued on our consolidated balance sheet as of
and for the year ended December 31, 2007.
We conduct business globally and, as a result, the Company or
one or more of our subsidiaries files income tax returns in the
U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business, we are subject
to examination by taxing authorities throughout the world,
including such major jurisdictions as China, France, Germany,
Hong Kong, Italy, Japan, Spain, Switzerland, the U.K. and the
United States. With the exception of China, which is open for
examination from 1997, we are no longer subject to
U.S. federal, state and local, or
non-U.S. income
tax examinations for years before 2002.
In 2007 we concluded audits in the United States and
internationally which resulted in settlements of $1,157 and
decreases in prior year tax positions of $6,697. It is
reasonably possible that unrecognized tax benefits related to
federal, state and foreign tax positions may decrease by $9,000
by December 31, 2008 if audits are completed or tax years
close during 2008.
The components of income before taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Domestic
|
|
$
|
47,680
|
|
|
$
|
101,855
|
|
|
$
|
145,135
|
|
International
|
|
|
12,045
|
|
|
|
55,785
|
|
|
|
121,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,725
|
|
|
$
|
157,640
|
|
|
$
|
266,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
December 31,
|
|
Current
|
|
|
Deferred
|
|
|
Current
|
|
|
Deferred
|
|
|
Current
|
|
|
Deferred
|
|
|
Federal
|
|
$
|
9,801
|
|
|
$
|
(149
|
)
|
|
$
|
41,423
|
|
|
$
|
(4,204
|
)
|
|
$
|
64,396
|
|
|
$
|
(6,280
|
)
|
State
|
|
|
3,210
|
|
|
|
(74
|
)
|
|
|
7,402
|
|
|
|
330
|
|
|
|
15,781
|
|
|
|
(5,312
|
)
|
Puerto Rico
|
|
|
|
|
|
|
|
|
|
|
2,470
|
|
|
|
(2,470
|
)
|
|
|
258
|
|
|
|
|
|
Foreign
|
|
|
5,708
|
|
|
|
1,230
|
|
|
|
16,347
|
|
|
|
(4,863
|
)
|
|
|
17,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,719
|
|
|
$
|
1,007
|
|
|
$
|
67,642
|
|
|
$
|
(11,207
|
)
|
|
$
|
98,363
|
|
|
$
|
(11,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amount computed
using the statutory federal income tax rate of 35% due to the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal income tax at statutory rate
|
|
$
|
20,904
|
|
|
|
35.0
|
%
|
|
$
|
55,174
|
|
|
|
35.0
|
%
|
|
$
|
93,445
|
|
|
|
35.0
|
%
|
Federal tax exempt operations in Puerto Rico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,897
|
)
|
|
|
(1.5
|
)
|
State taxes, net of applicable federal benefit
|
|
|
2,038
|
|
|
|
3.4
|
|
|
|
5,026
|
|
|
|
3.2
|
|
|
|
6,805
|
|
|
|
2.6
|
|
Foreign
|
|
|
2,775
|
|
|
|
4.6
|
|
|
|
(6,662
|
)
|
|
|
(4.2
|
)
|
|
|
(18,154
|
)
|
|
|
(6.8
|
)
|
Tax audit settlements
|
|
|
(8,970
|
)
|
|
|
(15.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
2,979
|
|
|
|
5.0
|
|
|
|
2,897
|
|
|
|
1.8
|
|
|
|
8,572
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,726
|
|
|
|
33.0
|
%
|
|
$
|
56,435
|
|
|
|
35.8
|
%
|
|
$
|
86,771
|
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences and carry-forwards that
give rise to deferred tax assets and liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2007
|
|
|
2006
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
3,116
|
|
|
$
|
|
|
|
$
|
4,492
|
|
|
$
|
|
|
Receivable allowances
|
|
|
10,003
|
|
|
|
|
|
|
|
11,709
|
|
|
|
|
|
Employee benefits accruals
|
|
|
1,971
|
|
|
|
|
|
|
|
3,037
|
|
|
|
|
|
Other
|
|
|
9,837
|
|
|
|
|
|
|
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$
|
24,927
|
|
|
$
|
|
|
|
$
|
21,633
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation and amortization
|
|
$
|
|
|
|
$
|
(499
|
)
|
|
$
|
334
|
|
|
$
|
|
|
Undistributed foreign earnings
|
|
|
1,699
|
|
|
|
|
|
|
|
1,699
|
|
|
|
|
|
Deferred compensation
|
|
|
5,626
|
|
|
|
|
|
|
|
10,259
|
|
|
|
|
|
Share-based compensation
|
|
|
5,717
|
|
|
|
|
|
|
|
3,734
|
|
|
|
|
|
Other (including certain state taxes)
|
|
|
1,653
|
|
|
|
|
|
|
|
558
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
|
4,242
|
|
|
|
|
|
|
|
2,913
|
|
|
|
|
|
Less valuation allowance
|
|
|
(3,995
|
)
|
|
|
|
|
|
|
(944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current
|
|
$
|
14,942
|
|
|
$
|
(499
|
)
|
|
$
|
18,553
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The valuation allowance relates to foreign net operating loss
carry-forwards that may not be realized. The valuation allowance
at December 31, 2007 of $3,995 includes $3,014 provided for
during 2007 relating primarily to net operating loss
carryforwards in Luxembourg.
Our consolidated income before taxes for the year ended
December 31, 2005 included earnings from our subsidiary in
Puerto Rico, which are substantially exempt from Puerto Rico
income tax under an exemption that expires in 2012 and federal
income taxes under an exemption that became limited after 2001
and expired after 2005.
Losses before income taxes from foreign operations were
$(10,807), $(9,004) and $(11,185) for the years ended
December 31, 2007, 2006 and 2005, respectively. At
December 31, 2007, the Company had $25,875 of foreign
operating loss carryforwards available to offset future foreign
taxable income. Of these operating loss carryforwards, $1,230
will expire in various years from 2008 through 2009, $9,650 will
expire in various years from 2012 through 2014, and $14,905
relates to operating loss carryforwards that may be carried
forward indefinitely.
As of December 31, 2007, the Company has indefinitely
reinvested approximately $110,506 of the cumulative
undistributed earnings of certain foreign subsidiaries. Such
earnings would be subject to U.S. taxes if repatriated to
the U.S. The amount of unrecognized deferred tax liability
associated with the permanently reinvested cumulative
undistributed earnings was approximately $23,601.
Our Class A Common Stock and Class B Common Stock are
identical in virtually all respects, except that shares of
Class A Common Stock carry one vote per share, while shares
of Class B Common Stock carry ten votes per share. In
addition, holders of Class A Common Stock have the right,
voting separately as a class, to elect 25% of the directors of
the Company, and vote together with the holders of Class B
Common Stock for the remaining directors. In 2007 and 2006, no
shares of Class B Common Stock were converted to
Class A Common Stock.
On September 23, 2003, our Board of Directors approved an
additional repurchase of up to 4,000,000 shares of our
Class A Common Stock. On March 3, 2005, our Board of
Directors approved a 100% increase in shares remaining under the
September 2003 repurchase program as of April 14, 2005, the
record date of a
2-for-1
stock split. The increase was effective immediately after the
May 2, 2005 distribution date. During 2005, on a post split
basis we repurchased 4,832,276 shares under that
authorization.
On August 12, 2005, our Board of Directors approved an
additional repurchase of 2,000,000 shares of our
Class A Common Stock. During 2006 and 2005, we repurchased
1,475,580 and 524,420 shares under this authorization,
respectively.
On February 7, 2006, our Board of Directors approved an
additional repurchase of 6,000,000 shares of our
Class A Common Stock. During 2007 and 2006, we repurchased
2,264,383 and 2,454,015 shares under this authorization,
respectively.
From time to time, we use
Rule 10b5-1
plans to facilitate share repurchases.
In the third quarter of 2005, the Company had non-cash financing
activities valued at approximately $504 related to the swap of
shares outstanding for payment of options exercised.
|
|
14.
|
Share-based
Compensation
|
Effective January 1, 2006, the Company adopted
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
64
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS 123, Accounting for Stock-Based
Compensation, and supersedes 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 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, 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 expense and general and
administrative expense, totaled $9,499 and $19,610 for the years
ended December 31, 2007 and 2006, respectively. Cost of
goods sold included $1,531 in 2007 compared to $2,843 in 2006.
Selling expense included $4,756 in 2007 compared to $10,720 in
2006. General and administrative expense included $3,212 in 2007
compared to $6,047 in 2006. The decrease in share-based
compensation costs is due to the impact of forfeitures of
nonvested shares due to executive departures, and a higher
estimated forfeiture rate of stock options.
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
consolidated statements of income for the year ended
December 31, 2005, no compensation expense was recognized
for stock option grants and the Employee Stock Purchase Plan.
However, the Company recognized compensation expense for
nonvested share awards of $10,210 ($6,892 net of taxes).
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 year ended December 31, 2005:
|
|
|
|
|
|
|
2005
|
|
|
Net income as reported
|
|
$
|
180,216
|
|
Add: Share-based employee compensation expense included in
reported net income, net of related tax effect
|
|
|
6,892
|
|
Deduct: Total share-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effect
|
|
|
15,331
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
171,777
|
|
|
|
|
|
|
Basic earnings per share, as reported
|
|
$
|
2.72
|
|
Pro forma basic earnings per share
|
|
$
|
2.59
|
|
Diluted earnings per share, as reported
|
|
$
|
2.66
|
|
Pro forma diluted earnings per share
|
|
$
|
2.54
|
|
Financial statement amounts for the year ended December 31,
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 consolidated
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 consolidated statement of cash
flows for the years ended December 31, 2007 and 2006, the
total excess tax benefit of $1,101 and $4,406, respectively,
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).
65
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company received $12,574 in proceeds on the exercise of
stock options under the Companys stock option and employee
stock purchase plans and recorded a tax benefit of $1,493
related to these stock option exercises during the year ended
December 31, 2007.
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 from authorized but unissued shares of the Companys
Class A Common Stock.
Stock
Options
In February 2007 our Board of Directors adopted The Timberland
Company 2007 Incentive Plan (the 2007 Plan), which
was subsequently approved by shareholders on May 17, 2007.
The 2007 Plan was established to provide for grants of awards to
key employees and directors of, and consultants and advisors to,
the Company or its affiliates who, in the opinion of the
Management Development and Compensation Committee of the Board
of Directors (MDCC), are in a position to make
significant contributions to the success of the Company and its
affiliates. The 2007 Plan is intended to replace the
Companys 1997 Incentive Plan, as amended (the 1997
Plan), and no new awards will be issued under the 1997
Plan. Awards under the 2007 Plan may take the form of stock
options, stock appreciation rights, restricted stock,
unrestricted stock, stock units, including restricted stock
units, performance awards, cash and other awards that are
convertible into or otherwise based on, the Companys
stock. A maximum of 4,000,000 shares may be issued under
the 2007 Plan, subject to adjustment as provided in the 2007
Plan. The 2007 Plan also contains limits with respect to the
awards that can be made to any one person. Stock options granted
under the 2007 Plan will be granted with an exercise price equal
to fair market value at date of grant. All options expire ten
years from date of grant. Awards granted under the 2007 Plan
will become exercisable or vest as determined by the
Administrator of the Plan.
In February 2007 the MDCC approved terms of The Timberland
Company 2007 Executive Long Term Incentive Program (2007
LTIP) with respect to equity awards to be made to certain
Company executives, and in February 2007 the Board of Directors
also approved the 2007 LTIP with respect to the Companys
Chief Executive Officer. The 2007 LTIP was established under the
2007 Plan. The settlement of the awards will be based on the
achievement of net income targets for the twelve month period
from January 1, 2007 through December 31, 2007. If the
threshold performance goal, as defined in the 2007 LTIP, is not
met, a minimum settlement is to be awarded. Awards are expected
to be settled in early 2008 but not later than March 31,
2008. The total minimum and maximum aggregate values to be
settled under the 2007 LTIP are $1,000 and $5,625, respectively.
The threshold performance goal, as defined in the 2007 LTIP, was
not met during 2007; therefore the minimum settlement of $1,000
will be awarded in the first quarter of 2008. The awards will be
settled 60% in stock options, which will vest equally over a
three year vesting schedule, and 40% in restricted stock, which
will vest equally over a two year vesting schedule. For purposes
of the settlement, the number of shares subject to the options
will be based on the value of the option as of the date of
issuance of the option using the Black-Scholes option pricing
model, and the number of restricted shares issued will be based
on the fair market value of the Companys stock on the date
of issuance. The Company had $247 included in accrued payroll
and related expense related to these awards at December 31,
2007.
Under the Companys 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 have been 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
66
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cash bonuses. Option grants and vesting periods were determined
by the MDCC of the Board of Directors. Outstanding stock options
granted under the 1997 Plan were granted with an exercise price
equal to 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
the grant date. Prior to 2007, 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. Upon
approval of the 2007 Plan, no new awards were issued under the
1997 Plan.
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 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 the 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.
Options to purchase an aggregate of 3,083,410, 3,029,012 and
2,517,920 shares were exercisable under all option
arrangements as of December 31, 2007, 2006 and 2005,
respectively. Under the existing stock option plans, there were
3,830,597, 1,008,990 and 1,752,562 shares available for
future grants as of December 31, 2007, 2006 and 2005,
respectively.
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 is estimated using the historical
exercise behavior of employees and 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
29.2%
|
|
|
|
30.1%
|
|
|
|
29.5%
|
|
Risk-free interest rate
|
|
|
4.6%
|
|
|
|
4.7%
|
|
|
|
3.6%
|
|
Expected life (in years)
|
|
|
4.7
|
|
|
|
4.2
|
|
|
|
5.1
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
67
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes transactions under all stock option
arrangements for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Outstanding at January 1, 2007
|
|
|
5,253,794
|
|
|
$
|
27.07
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
825,031
|
|
|
|
25.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(594,578
|
)
|
|
|
18.66
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
(869,644
|
)
|
|
|
30.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
4,614,603
|
|
|
$
|
27.31
|
|
|
|
6.1
|
|
|
$
|
2,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
4,477,446
|
|
|
$
|
27.23
|
|
|
|
6.0
|
|
|
$
|
2,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
3,083,410
|
|
|
$
|
25.98
|
|
|
|
5.0
|
|
|
$
|
2,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $8.52, $10.43 and $11.49 for the years
ended December 31, 2007, 2006 and 2005, respectively. The
total intrinsic values of stock options exercised during the
years ended December 31, 2007, 2006 and 2005 were $5,032,
$12,698 and $19,188, respectively.
Total unrecognized share-based compensation expense related to
nonvested stock options was $7,298 as of December 31, 2007.
The cost is expected to be recognized over the weighted-average
period of 1.4 years.
Nonvested
Shares
As noted above, the Companys 1997 Plan and 2007 Plan
provide for grants of nonvested shares. Under the 1997 Plan, the
Company generally grants nonvested shares with a three year
vesting period, which is the same as the contractual term. Under
the 2007 Plan, the awards will vest equally over a two year
period. Expense is recognized over the awards requisite
service period, which begins on the first day of the measurement
period and ends on the last day of the vesting period. The fair
value of nonvested share grants is determined by the market
value at the date of the grant. Changes in the Companys
nonvested shares for the year ended December 31, 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Nonvested at January 1, 2007
|
|
|
932,476
|
|
|
$
|
32.59
|
|
Awarded
|
|
|
54,333
|
|
|
|
25.78
|
|
Vested
|
|
|
(391,019
|
)
|
|
|
36.74
|
|
Forfeited
|
|
|
(215,768
|
)
|
|
|
29.99
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
380,022
|
|
|
$
|
28.82
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested during the year ended
December 31, 2007 was $10,059.
Unrecognized compensation expense related to nonvested share
grants was $3,280 as of December 31, 2007. The expense is
expected to be recognized over a weighted-average period of
1.2 years.
In February 2007 we announced that Kenneth Pucker, Executive
Vice President and Chief Operating Officer would be leaving the
Company effective March 31, 2007. When Mr. Pucker left
the Company, he vested in certain shares previously awarded
under the Companys incentive compensation plans and
forfeited certain other shares awarded but not vested upon
termination. An award, based on the achievement of a 2004
68
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
performance target, of 200,000 nonvested shares with a value of
$7,904 was issued on July 5, 2005 and was to vest two years
after that date. This award vested when he separated, per the
terms of the award agreement. As part of our global
reorganization, $593 was recorded as a restructuring charge,
which represents the expense that would have been recorded for
these shares in the second and third quarters of 2007 had
Mr. Pucker remained with the Company. Additionally, upon
his departure, Mr. Pucker forfeited 35,819 shares
granted in March 2004 that would have cliff-vested in March
2008. The Company recorded a credit of approximately $792 in
restructuring reflecting the reversal of expense associated with
these shares recorded through December 2006.
In September 2006, our Board of Directors approved an award of
$1,000 of nonvested share grants of Class A Common Stock
under the Companys 1997 Plan, based on the achievement of
a revenue target over a twelve month measurement period from
September 30, 2006 through September 28, 2007. During
the first quarter of 2007 the Company determined that it was not
probable that the target would be achieved, and, accordingly,
share-based compensation cost of $250 that was recorded in
accrued payroll and related expenses on the consolidated balance
sheet at December 31, 2006, was reversed.
In 2004, our Board of Directors approved awards of nonvested
share grants of Class A Common Stock under the
Companys 1997 Plan based on achieving certain performance
targets for the periods occurring between January 1, 2004
through December 31, 2006. Based on the achievement of 2006
performance targets, 36,232 nonvested shares with a value of
$934 were issued on July 10, 2007. The number of shares
issued was determined by the share price on the issuance date.
These shares will fully vest three years from the issuance date.
During 2007, 4,579 of these nonvested shares with a value of
$118 were forfeited by certain executives when they left the
Company. Based on the achievement of 2005 performance targets,
377,770 nonvested shares with a value of $10,000 were issued on
July 5, 2006 and will fully vest three years from that
date. During 2007, 130,162 of these nonvested shares with a
value of $3,445 were forfeited by certain executives when they
left the Company. Based on the achievement of 2004 performance
targets, 275,117 nonvested shares with a value of $10,873 were
issued on July 5, 2005 and will vest equally over three
years from that date. During 2007, 45,208 of these nonvested
shares with a value of $1,787 were forfeited by certain
executives when they left the Company. All of these shares are
subject to restrictions on sale and transferability, a risk of
forfeiture and certain other terms and conditions.
In 2003, our Board of Directors approved up to
195,000 shares of Class A Common Stock for performance
based programs. On March 3, 2004, we issued 186,276
restricted shares of Class A Common Stock under the
Companys 1997 Plan. The award of these restricted share
grants was based on the achievement of specified performance
targets for the period from July 1, 2003 through
December 31, 2003. These shares are subject to restrictions
on sale and transferability, a risk of forfeiture and certain
other terms and conditions. These restrictions lapse equally
three and four years after the award date. As discussed above,
our former Chief Operating Officer forfeited 35,819 of these
shares which were scheduled to vest in March of 2008.
Through December 31, 2005, we recorded deferred
compensation in stockholders equity on our consolidated
balance sheet to reflect the unvested portion of the nonvested
share grants. Under the provisions of SFAS 123(R), we are
no longer permitted to record deferred compensation in
stockholders equity for the unvested portion of nonvested
share awards. 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 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
69
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
24.7
|
%
|
|
|
30.9
|
%
|
|
|
25.9
|
%
|
Risk-free interest rate
|
|
|
5.06
|
%
|
|
|
4.8
|
%
|
|
|
2.8
|
%
|
Expected life (in months)
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee purchases totaled 80,151, 84,685 and 74,094 shares
in 2007, 2006 and 2005, respectively, at prices ranging from
$15.37 to $27.67 per share. As of December 31, 2007, a
total of 155,504 shares were available for future
purchases. The weighted-average fair values of the
Companys ESP Plan purchase rights were approximately
$6.42, $6.97 and $7.14 for the years ended December 31,
2007, 2006 and 2005, respectively.
As of December 31, 2007, all ESP Plan compensation expense
was recognized as all ESP Plan awards were vested.
|
|
15.
|
Cash
Incentive Awards
|
The Company maintains a short-term incentive plan for all
employees whereby a cash bonus is paid for the achievement of
operating income and operating working capital targets in the
fiscal year. During the fourth quarter of 2007, the Company
reversed approximately $7,000 in expense accrued through the
first three quarters of fiscal 2007 when it was determined it
was not probable that the target would be achieved.
In September 2006, our Board of Directors approved a $2,000 cash
incentive award to be issued in 2007 based on the achievement of
a revenue target over a twelve month measurement period from
September 30, 2006 through September 28, 2007. During
the first quarter of 2007, the Company determined that it was
not probable that the target would be achieved, and,
accordingly, it reversed $500 that was recorded in accrued
payroll and related expenses on the consolidated balance sheet
at December 31, 2006.
In March 2005, our Board of Directors approved a cash incentive
award of $1,250, based on the achievement of a performance
target over a one year measurement period from January 1,
2005 through December 31, 2005. This award was recorded in
accrued payroll and related expense on the consolidated balance
sheet as of December 31, 2006 and paid in March 2007.
In 2004, our Board of Directors approved a cash incentive award
of up to $3,000 which would have been paid in 2007. However, the
performance target on which the award was based was not achieved
over the three year measurement period from January 1, 2004
through December 31, 2006. Accordingly, in 2006 the Company
reversed the $1,908 accrual for this award which was included in
deferred compensation and other long-term liabilities on the
consolidated balance sheet as of December 31, 2005.
|
|
16.
|
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.
70
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
worldwide, the management costs and expenses associated with our
worldwide licensing efforts and certain marketing expenses and
value added services. We have reclassified licensing revenues
generated in Europe and Asia from the International segment to
U.S. Wholesale in 2006 and 2005 to conform to the current
period presentation, which, as a result of management
classification changes, now designates worldwide licensing
revenues under the management of U.S. Wholesale.
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, 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, as well as
through our
e-commerce
business in the United Kingdom. Revenues associated with the
sale of licensed products are classified in the
U.S. Wholesale segment as that is where the business is
managed.
The Unallocated Corporate component of segment reporting
consists primarily of corporate support and administrative
functions, costs related to share-based compensation, United
States distribution expenses, global marketing support expenses,
worldwide product development and other costs incurred in
support of Company-wide activities. Unallocated Corporate also
includes total other income/(expense), net, which is comprised
of interest income, net, and other miscellaneous
income/(expense), net, which includes foreign exchange gains and
losses resulting from changes in the fair value of financial
derivatives not accounted for as hedges and the timing and
settlement of local currency denominated assets and liabilities
and other miscellaneous non-operating income/(expense). Such
income/(expense) is not allocated among the reportable business
segments.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We
evaluate segment performance based on operating income 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.
The following tables present the segment information as of and
for the years ended December 31, 2007, 2006 and 2005,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Consumer
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
Wholesale
|
|
|
Direct
|
|
|
International
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
509,762
|
|
|
$
|
191,440
|
|
|
$
|
735,249
|
|
|
$
|
|
|
|
$
|
1,436,451
|
|
Operating income/(loss)
|
|
|
111,282
|
|
|
|
9,477
|
|
|
|
92,518
|
|
|
|
(154,098
|
)
|
|
|
59,179
|
|
Interest income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
835
|
|
|
|
835
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(289
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
$
|
111,282
|
|
|
$
|
9,477
|
|
|
$
|
92,518
|
|
|
$
|
(153,552
|
)
|
|
$
|
59,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
258,144
|
|
|
$
|
33,951
|
|
|
$
|
387,181
|
|
|
$
|
157,069
|
|
|
$
|
836,345
|
|
Goodwill
|
|
|
35,170
|
|
|
|
794
|
|
|
|
8,876
|
|
|
|
|
|
|
|
44,840
|
|
Expenditures for capital additions
|
|
|
2,440
|
|
|
|
3,977
|
|
|
|
17,559
|
|
|
|
6,503
|
|
|
|
30,479
|
|
Depreciation and amortization
|
|
|
2,903
|
|
|
|
2,434
|
|
|
|
9,609
|
|
|
|
16,361
|
|
|
|
31,307
|
|
71
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Consumer
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
Wholesale
|
|
|
Direct
|
|
|
International
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
647,889
|
|
|
$
|
197,667
|
|
|
$
|
722,063
|
|
|
$
|
|
|
|
$
|
1,567,619
|
|
Operating income/(loss)
|
|
|
180,229
|
|
|
|
16,603
|
|
|
|
146,247
|
|
|
|
(180,443
|
)
|
|
|
162,636
|
|
Interest income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
966
|
|
|
|
966
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,962
|
)
|
|
|
(5,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
$
|
180,229
|
|
|
$
|
16,603
|
|
|
$
|
146,247
|
|
|
$
|
(185,439
|
)
|
|
$
|
157,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
251,658
|
|
|
$
|
31,627
|
|
|
$
|
392,212
|
|
|
$
|
184,880
|
|
|
$
|
860,377
|
|
Goodwill
|
|
|
31,745
|
|
|
|
794
|
|
|
|
7,178
|
|
|
|
|
|
|
|
39,717
|
|
Expenditures for capital additions
|
|
|
3,316
|
|
|
|
4,339
|
|
|
|
13,568
|
|
|
|
15,367
|
|
|
|
36,590
|
|
Depreciation and amortization
|
|
|
2,726
|
|
|
|
2,502
|
|
|
|
7,851
|
|
|
|
14,806
|
|
|
|
27,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Consumer
|
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
Wholesale
|
|
|
Direct
|
|
|
International
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
666,949
|
|
|
$
|
212,645
|
|
|
$
|
686,087
|
|
|
$
|
|
|
|
$
|
1,565,681
|
|
Operating income/(loss)
|
|
|
215,119
|
|
|
|
36,057
|
|
|
|
157,683
|
|
|
|
(168,758
|
)
|
|
|
240,101
|
|
Interest income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,335
|
|
|
|
3,335
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,551
|
|
|
|
23,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
$
|
215,119
|
|
|
$
|
36,057
|
|
|
$
|
157,683
|
|
|
$
|
(141,872
|
)
|
|
$
|
266,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
249,444
|
|
|
$
|
30,299
|
|
|
$
|
354,000
|
|
|
$
|
156,956
|
|
|
$
|
790,699
|
|
Goodwill
|
|
|
31,715
|
|
|
|
794
|
|
|
|
6,994
|
|
|
|
|
|
|
|
39,503
|
|
Expenditures for capital additions
|
|
|
1,941
|
|
|
|
3,428
|
|
|
|
8,616
|
|
|
|
12,187
|
|
|
|
26,172
|
|
Depreciation and amortization
|
|
|
868
|
|
|
|
2,491
|
|
|
|
6,610
|
|
|
|
14,506
|
|
|
|
24,475
|
|
The following summarizes our operations in different geographic
areas for the years ended December 31, 2007, 2006 and 2005,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
Other
|
|
|
|
|
States
|
|
Europe
|
|
Asia
|
|
Foreign
|
|
Consolidated
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
691,768
|
|
|
$
|
548,342
|
|
|
$
|
155,811
|
|
|
$
|
40,530
|
|
|
$
|
1,436,451
|
|
Long-lived assets
|
|
|
146,349
|
|
|
|
35,973
|
|
|
|
4,325
|
|
|
|
13,090
|
|
|
|
199,737
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
837,654
|
|
|
$
|
547,091
|
|
|
$
|
145,436
|
|
|
$
|
37,438
|
|
|
$
|
1,567,619
|
|
Long-lived assets
|
|
|
141,786
|
|
|
|
33,238
|
|
|
|
4,844
|
|
|
|
13,185
|
|
|
|
193,053
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
872,429
|
|
|
$
|
533,146
|
|
|
$
|
133,396
|
|
|
$
|
26,710
|
|
|
$
|
1,565,681
|
|
Long-lived assets
|
|
|
139,288
|
|
|
|
19,388
|
|
|
|
4,044
|
|
|
|
10,328
|
|
|
|
173,048
|
|
72
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The U.S. Wholesale segment, less revenues from licensed
products outside of the U.S., the U.S. Consumer Direct
segment and Unallocated Corporate comprise the United States
geographic area. The International segment is divided into three
geographic areas: Europe, Asia and Other Foreign. Other Foreign
revenues consist primarily of revenues in Canada and Latin
America. Other Foreign assets consist primarily of the
Companys manufacturing assets in the Caribbean and assets
related to our sourcing operations.
The following summarizes our revenue by product group for the
years ended December 31, 2007, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Footwear
|
|
$
|
1,004,808
|
|
|
$
|
1,126,931
|
|
|
$
|
1,200,089
|
|
Apparel and accessories
|
|
|
411,620
|
|
|
|
422,435
|
|
|
|
348,875
|
|
Royalty and other
|
|
|
20,023
|
|
|
|
18,253
|
|
|
|
16,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,436,451
|
|
|
$
|
1,567,619
|
|
|
$
|
1,565,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We maintain a contributory 401(k) Retirement Earnings Plan (the
401(k) Plan) for eligible salaried and hourly
employees who are at least 18 years of age. Under the
provisions of the 401(k) Plan, employees may contribute up to
40% of their base salary up to certain limits. The 401(k) Plan
provides for the Company matching contributions not to exceed 3%
of the employees compensation or, if less, 50% of the
employees contribution. Vesting of our contribution begins
at 25% after one year of service and increases by 25% each year
until full vesting occurs. We maintain a non-contributory profit
sharing plan for eligible hourly employees not covered by the
401(k) Plan. Through December 31, 2005, we maintained two
contributory 165(e) Retirement Earnings Plans (the 165(e)
Plans) for eligible salaried and hourly employees of our
Puerto Rico manufacturing facility. The 165(e) Plans were closed
as of December 31, 2005 in connection with the closure of
our Puerto Rico manufacturing facility. Our contribution expense
under all retirement plans was $1,912, $1,941 and $1,654 in
2007, 2006 and 2005, respectively.
|
|
18.
|
Restructuring
and Related Costs
|
The Company incurred net restructuring and related charges of
$24,659, $3,868 and $4,251 in the years ended 2007, 2006 and
2005, respectively. The components of these charges are
discussed below.
Global
Efficiency Review
As part of our ongoing initiative to rationalize our operating
expense structure, in the fourth quarter we undertook a review
of each function in our entire global organization and announced
plans to transition to a reorganized, more efficient
organization. This included changes to the U.S. sales team,
a streamlined global product development organization, and
reorganized support organizations around the globe. We incurred
a net restructuring charge of approximately $6,800 in the fourth
quarter of 2007, primarily related to severance, of which
$3,100, $2,600 and $1,100 were reported in the Unallocated
Corporate, International, and U.S. Wholesale segments,
respectively. We anticipate that cash payments associated with
this plan will continue throughout 2008, but do not expect that
any additional charges under this plan will be material.
Global
Retail Portfolio Review
During the third quarter of 2007, we announced our decision to
close approximately 40, principally larger, specialty retail
stores in the U.S., Europe and Asia. This action is consistent
with the Companys plan to continue to develop smaller,
footwear-focused stores in the U.S. and certain
international markets. The Company also plans to close several
underperforming U.S. outlet stores. We closed 6 stores by
the end of
73
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, and expect the majority of the remaining store closures to
occur in the first half of 2008. The Company evaluated the
carrying value of property and equipment related to the stores
to be closed using estimates of future operating results and
undiscounted cash flows. A liability is recorded for lease
termination costs when the Company terminates the lease contract
in accordance with the contract terms or has negotiated a
termination with the counterparty. The Company expects to incur
an estimated $15,900 of pre-tax restructuring charges associated
with the implementation of this program, of which approximately
$9,700 and $6,200 will be reported in the Consumer Direct and
International segments, respectively. The restructuring charges
expected to be incurred in the Consumer Direct segment in
connection with this program include approximately $4,200 of
lease termination costs, $3,900 of impairment charges related to
property and equipment and $1,600 of severance and related
costs. For the year ended December 31, 2007 the Consumer
Direct segment incurred impairment charges related to property
and equipment of $3,900, $2,100 for lease termination costs, and
severance and related costs for field employees of $1,500. The
restructuring charges expected to be incurred in the
International segment in connection with this program include
approximately $2,800 of lease termination costs, $1,900 of
impairment charges related to property and equipment and $1,500
of severance and related costs. For the year ended
December 31, 2007 the International segment incurred
impairment charges related to property and equipment of $1,900
and severance and related costs for field employees of $1,000.
The remaining expected charges of $5,500, primarily related to
lease termination costs, are expected to be recorded in the
first half of 2008. Cash payments associated with this program
are expected to be made through the fourth quarter of 2008.
North
American Apparel Licensing
During the first quarter of 2007, we entered into a five year
licensing agreement with Phillips-Van Heusen for the design,
sourcing and marketing of apparel in North America under the
Timberland
®
brand, beginning with the Fall 2008 line. We incurred a
restructuring charge of $3,111 in our U.S. Wholesale
segment in the year ended December 31, 2007 to reflect
employee severance, outplacement services and asset disposal
costs associated with the implementation of this strategy. Cash
payments associated with this initiative are expected to be made
through the fourth quarter of 2008.
Executive
Departure
During the first quarter of 2007, we also announced that Kenneth
P. Pucker, Executive Vice President and Chief Operating Officer
would be leaving the Company effective March 31, 2007.
Mr. Pucker entered into a separation agreement with the
Company, which provided for a cash payment and, pursuant to a
prior award agreement (See Note 14), the vesting of certain
shares previously awarded under the Companys incentive
compensation plans. In connection with our Global Reorganization
discussed below, the Company recorded a restructuring charge of
approximately $3,593 in the first quarter of 2007 to record
these costs. Additionally, a credit of approximately $792 was
recorded to restructuring associated with the forfeiture of
other shares awarded to Mr. Pucker but not vested upon
termination. See Note 14 for details of the impact of
share-based awards included in this restructuring charge. Of the
total charge, $3,000 was a cash item that was paid in the second
quarter of 2007. The remaining $593 charge and the $(792) credit
were recorded as a net reduction to equity. The total net charge
of $2,801 is reflected in our Unallocated Corporate component
for segment reporting.
Global
Reorganization
During the fourth quarter of 2006, the Company announced a
global reorganization to better align our organizational
structure with our key consumer categories. During the year
ended December 31, 2007 we incurred charges of $1,602 of
which approximately $1,400 is included in our International
segment and $200 is included in Unallocated Corporate, for
severance and employment related items. In 2006, we recorded
$2,969 which is primarily included in Unallocated Corporate, for
severance and employment related items.
74
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash payments associated with the global reorganization are
expected to be made through the first quarter of 2008.
European
Shared Service Center
During the first quarter of 2006, we initiated a plan to create
a European finance shared service center in Schaffhausen,
Switzerland. This shared service center is responsible for all
transactional and statutory financial activities that had
previously been performed by our locally based finance
organizations. During the years ended December 31, 2007 and
2006 we recorded charges in connection with this restructuring
plan of $0 and $677, respectively. This restructuring plan was
completed in 2007.
Puerto
Rico Manufacturing Facility
During fiscal 2005, the Company consolidated its Caribbean
manufacturing operations. We ceased operations in our Puerto
Rico manufacturing facility and expanded our manufacturing
volume in the Dominican Republic. The Puerto Rico closure was
completed in the second quarter of 2006. Severance and employee
related charges, as well as other fees associated with the
closure of the facility, recorded in connection with this
restructuring plan were $222 and $4,036 in the years ended
December 31, 2006 and 2005, respectively. In addition, $215
of accelerated depreciation resulting from the change in
estimated useful lives of assets related to the closing of the
Puerto Rico manufacturing facility was recorded in 2005. This
restructuring plan is expected to be completed in the first
quarter of 2008.
The following table sets forth the cash components of our
restructuring reserve activity for the years ended
December 31, 2007 and 2006. The non-cash components and
other amounts reported as restructuring and related costs in the
consolidated statement of income have been summarized in the
notes to the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at
|
|
|
|
|
|
|
|
|
Liability at
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Charges and
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
(Credits)(a)
|
|
|
Cash Payments
|
|
|
2007
|
|
|
|
|
|
|
|
|
Global Efficiency Review
|
|
$
|
|
|
|
$
|
7,001
|
|
|
$
|
(1,363
|
)
|
|
$
|
5,638
|
|
|
|
|
|
|
|
|
|
Global Retail Portfolio Review
|
|
|
|
|
|
|
4,623
|
|
|
|
(2,153
|
)
|
|
|
2,470
|
|
|
|
|
|
|
|
|
|
North American Apparel Licensing
|
|
|
|
|
|
|
3,111
|
|
|
|
(1,940
|
)
|
|
|
1,171
|
|
|
|
|
|
|
|
|
|
Global Reorganization
|
|
|
2,969
|
|
|
|
4,602
|
|
|
|
(7,538
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
European Shared Service Center
|
|
|
368
|
|
|
|
|
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Manufacturing Facility
|
|
|
475
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals as of December 31, 2007
|
|
$
|
3,812
|
|
|
$
|
19,337
|
|
|
$
|
(13,677
|
)
|
|
$
|
9,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The charges in the restructuring reserve table above exclude a
net non-cash credit of approximately $450 related to the vesting
and forfeiture of certain shares, which was recorded as a
reduction to equity, and $5,800 of non-cash impairment charges,
which were recorded as a reduction to property, plant and
equipment, related to property and equipment associated with
stores closing as a result of the Global Retail Portfolio Review
in the third quarter of 2007.
|
75
THE
TIMBERLAND COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at
|
|
|
|
|
|
|
|
|
Liability at
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Charges and
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
(Credits)
|
|
|
Cash Payments
|
|
|
2006
|
|
|
|
|
|
|
|
|
Global Reorganization
|
|
$
|
|
|
|
$
|
2,969
|
|
|
$
|
|
|
|
$
|
2,969
|
|
|
|
|
|
|
|
|
|
European Shared Service Center
|
|
|
|
|
|
|
677
|
|
|
|
(309
|
)
|
|
|
368
|
|
|
|
|
|
|
|
|
|
Puerto Rico Manufacturing Facility
|
|
|
3,963
|
|
|
|
222
|
|
|
|
(3,710
|
)
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals as of December 31, 2006
|
|
$
|
3,963
|
|
|
$
|
3,868
|
|
|
$
|
(4,019
|
)
|
|
$
|
3,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and credits in the tables above consist primarily of
severance, health benefits and other employee related costs. The
cash payments in the table above are principally comprised of
severance and related costs.
|
|
19.
|
Commitments
and Contingencies
|
Leases
We lease our corporate headquarters facility and other
management offices, manufacturing facilities, retail stores,
showrooms, two distribution facilities and certain equipment
under non-cancelable operating leases expiring at various dates
through 2021. Minimum commitments associated with retail stores
that will be closing as part of our Global Retail Portfolio
Review have been included as per the terms of the original
lease, unless the early lease termination documents had been
executed. The approximate minimum rental commitments under all
non-cancelable leases as of December 31, 2007 are as
follows:
|
|
|
|
|
2008
|
|
$
|
51,567
|
|
2009
|
|
|
41,846
|
|
2010
|
|
|
32,756
|
|
2011
|
|
|
27,302
|
|
2012
|
|
|
19,916
|
|
Thereafter
|
|
|
49,338
|
|
|
|
|
|
|
Total
|
|
$
|
222,725
|
|
|
|
|
|
|
Most of the leases for retail space provide for renewal options,
contain normal escalation clauses and require us to pay real
estate taxes, maintenance and other expenses. The aggregate base
rent obligation for a lease is expensed on a straight-line basis
over the term of the lease. Base rent expense for all operating
leases was $57,732, $50,921 and $41,803 for the years ended
December 31, 2007, 2006 and 2005, respectively. Percentage
rent, based on sales levels, for the years ended
December 31, 2007, 2006 and 2005 was $10,597, $10,370 and
$12,680, respectively.
Product
Recall
In the third quarter of 2007, the Company announced the
voluntary recall of some Timberland
PRO
®
Direct Attach Steel Toe Series products due to a potential
safety issue. The Company recorded a charge of $2,765 in the
third quarter ended September 28, 2007 related to the
recall based on an estimate of retailer inventory returns and
consumer product replacement costs. In the fourth quarter of
2007 the Company reversed $1,067 of expense, as actual returns
were lower than estimated, and incurred incremental air freight
and other costs associated with the recall of approximately $435.
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.
76
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Managements
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures which
are designed to ensure that information required to be disclosed
by us in reports we file or submit under the Securities Exchange
Act of 1934 (the Exchange Act) is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules
and forms. These disclosure controls and procedures include
controls and procedures designed to ensure that information
required to be disclosed under the federal securities laws is
accumulated and communicated to our management on a timely basis
to allow decisions regarding required disclosure.
Based on their evaluation, our principal executive officer and
principal financial officer have concluded that our disclosure
controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act were effective as of the end of the
period covered by this report.
Changes
in Internal Control over Financial Reporting
Other than progress on remediation of the previously reported
material weakness discussed below, 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
December 31, 2007, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
As of December 31, 2006, we identified a material weakness
in our internal control over financial reporting with respect to
controls over the proper application of generally accepted
accounting principles for certain complex transactions,
including the accounting for derivative instruments. During
2007, we implemented measures designed to remediate the material
weakness referred to above. As described in our
Form 10-Q
for the period ended September 28, 2007, the following
changes to our internal control over financial reporting were
made:
|
|
|
|
|
The Company supplemented its accounting staff by hiring key
accounting personnel with the technical accounting expertise
necessary to evaluate and document complex transactions.
|
|
|
|
The Company has supplemented its existing processes to perform
additional internal reviews of underlying transactions requiring
complex accounting treatment and to evaluate the conclusions
reached.
|
|
|
|
The Company has engaged outside consultants to provide support
and technical expertise regarding the documentation, initial and
ongoing testing of its hedges and the application of hedge
accounting to enhance its existing internal financial control
policies and procedures and to ensure the hedges are accounted
for in accordance with generally accepted accounting principles.
|
Management evaluated the operating effectiveness of the
remediation procedures through the end of the fourth quarter of
2007 and concluded that the implementation of those efforts has
remediated the material weakness described above.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Act
Rules 13a-15(f).
Timberlands internal control over financial reporting is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
77
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
or compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Timberlands
internal control over financial reporting as of the end of the
period covered by this report. In making this assessment,
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control Integrated Framework.
Based on
our assessment and those criteria, management believes that
Timberlands internal control over financial reporting was
effective as of the end of the period covered by this report.
As discussed in Note 7 to the consolidated financial
statements included in Item 8 of this Annual Report on
Form 10-K,
we acquired substantially all of the assets of IPATH, LLC on
April 25, 2007 and put them into a newly formed subsidiary,
Ipath Footwear Inc. As a result of the timing of the acquisition
and as permitted by the Securities and Exchange Commission,
management has excluded internal controls at Ipath Footwear Inc.
from its assessment of the internal control over financial
reporting as of December 31, 2007. Ipath Footwear Inc.
represents less than 1% of net and total assets, respectively,
less than 1% of revenue and less than 2% of net income of the
consolidated financial statement amounts as of and for the year
ended December 31, 2007.
Timberlands independent registered public accounting firm
has issued their report on the effectiveness of
Timberlands internal control over financial reporting,
which appears below.
78
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The Timberland
Company
Stratham, New Hampshire
We have audited the internal control over financial reporting of
The Timberland Company and subsidiaries (the
Company) as of December 31, 2007 based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in
Managements Annual Report on Internal Control Over
Financial Reporting, management excluded from its assessment the
internal control over financial reporting at Ipath Footwear
Inc., which was acquired on April 25, 2007 and whose
financial statements constitute less than 1% of net and total
assets, respectively, less than 1% of revenues, and less than 2%
of net income of the consolidated financial statement amounts as
of and for the year ended December 31, 2007. Accordingly,
our audit did not include the internal control over financial
reporting at Ipath Footwear Inc. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
79
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2007 of
the Company and our report dated February 29, 2008
expressed an unqualified opinion on those financial statements
and financial statement schedule and included an explanatory
paragraph regarding the Companys adoption of Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
, effective
January 1, 2007 and the adoption of Statement of Financial
Accounting Standards No. 123R,
Share-Based Payment,
effective January 1, 2006.
/S/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 29, 2008
80
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Please refer to the information set forth under the caption
Executive Officers of the Registrant in Item 1
of Part I of this Annual Report on
Form 10-K
and to the information under the captions Required Votes
and Method of Tabulation, Item 1. Election of
Directors, Information with Respect to
Nominees, Corporate Governance and Code of
Ethics, The Audit Committee and
Section 16(a) Beneficial Ownership Reporting
Compliance in our definitive Proxy Statement (the
2008 Proxy Statement) relating to our 2008 Annual
Meeting of Stockholders, that will be filed with the Securities
and Exchange Commission within 120 days after the close of
our fiscal year ended December 31, 2007, which information
is incorporated herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Please refer to the information set forth under the captions
Directors Compensation for Fiscal Year 2007,
Executive Compensation and all sub-captions
thereunder, and Compensation Committee Interlocks and
Insider Participation in our 2008 Proxy Statement, which
information is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Please refer to the information set forth under the caption
Security Ownership of Certain Beneficial Owners and
Management in our 2008 Proxy Statement, which information
is incorporated herein by reference.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
|
Number of securities
|
|
|
|
|
|
available for future
|
|
|
|
to be issued
|
|
|
Weighted-average
|
|
|
issuance under
|
|
|
|
upon exercise of
|
|
|
exercise price of
|
|
|
equity compensation plans
|
|
|
|
outstanding options,
|
|
|
outstanding options,
|
|
|
(excluding securities
|
|
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
reflected in column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
4,614,603
|
|
|
$
|
27.31
|
|
|
|
3,830,597
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,614,603
|
|
|
$
|
27.31
|
|
|
|
3,830,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes an award approved in 2007 by our Board of Directors of
stock options and restricted stock under the Companys 2007
Plan based on achieving net income targets for the twelve month
period from January 1, 2007 through December 31, 2007.
In accordance with the 2007 Plan, the minimum award amount of
$1.0 million will be settled 60% in stock options, which
will vest equally over a three year vesting schedule, and 40% in
restricted stock, which will vest equally over a two year
vesting schedule. The options and shares will be issued not
later than March 31, 2008. For purposes of the settlement,
the number of shares subject to the options will be based on the
value of the option as of the date of issuance of the option
using the Black-Scholes option pricing model, and the number of
restricted shares issued will be based on the fair market value
of the Companys stock on the date of issuance. All of
these shares are
|
81
|
|
|
|
|
subject to restrictions on sale and transferability, a risk of
forfeiture and certain other terms and conditions.
|
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Please refer to the information set forth under the captions
Board Independence, The Audit Committee
(introductory paragraph), and Certain Relationships and
Related Transactions in our 2008 Proxy Statement, which
information is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Please refer to the information set forth under the captions
Audit and Non-Audit Fees and Audit Committee
Pre-Approval of Audit and Non-Audit Services in our 2008
Proxy Statement, which information is incorporated herein by
reference.
82
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)(1)
FINANCIAL STATEMENTS.
The
following consolidated financial statements are included in
Item 8 of this Annual Report on
Form 10-K
and appear on the pages shown below:
|
|
|
|
|
|
|
Form 10-K Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
45
|
|
Consolidated Balance Sheets as of December 31, 2007 and 2006
|
|
|
46
|
|
For the years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
Consolidated Statements of Income
|
|
|
47
|
|
Consolidated Statements of Changes in Stockholders Equity
|
|
|
48
|
|
Consolidated Statements of Cash Flows
|
|
|
49
|
|
Notes to Consolidated Financial Statements
|
|
|
50-76
|
|
(a)(2)
FINANCIAL STATEMENT SCHEDULE.
The
following additional financial data appearing on the pages shown
below should be read in conjunction with the consolidated
financial statements:
|
|
|
|
|
|
|
Form 10-K Page
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
87
|
|
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and have, therefore, been omitted.
(b)
EXHIBITS.
Listed below are the
Exhibits filed or furnished as part of this report, some of
which are incorporated by reference from documents previously
filed by us with the Securities and Exchange Commission in
accordance with the provisions of
Rule 12b-32
of the Exchange Act.
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
(3
|
)
|
|
ARTICLES OF INCORPORATION AND BY-LAWS
|
|
3
|
.1
|
|
(a) Restated Certificate of Incorporation dated
May 14, 1987(8)
|
|
|
|
|
(b) Certificate of Amendment of Restated Certificate of
Incorporation dated May 22, 1987(8)
|
|
|
|
|
(c) Certificate of Ownership merging The Nathan Company
into The Timberland Company dated July 31, 1987(8)
|
|
|
|
|
(d) Certificate of Amendment of Restated Certificate of
Incorporation dated June 14, 2000(8)
|
|
|
|
|
(e) Certificate of Amendment of Restated Certificate of
Incorporation dated September 27, 2001(9)
|
|
3
|
.2
|
|
Amended and restated By-Laws, dated February 28, 2007(7)
|
|
(4
|
)
|
|
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES (See also Exhibits 3.1 and 3.2)
|
|
4
|
.1
|
|
Revised specimen stock certificate for shares of the
Companys Class A Common Stock(15)
|
|
(10
|
)
|
|
MATERIAL CONTRACTS
|
|
10
|
.1
|
|
Agreement dated as of August 29, 1979 between The
Timberland Company and Sidney W. Swartz(1)
|
|
10
|
.2
|
|
(a) The Companys 1987 Stock Option Plan, as amended(3)
|
|
|
|
|
(b) The Companys 1997 Incentive Plan, as amended(10)
|
|
10
|
.3
|
|
The Companys 1991 Employee Stock Purchase Plan, as
amended(5)
|
|
10
|
.4
|
|
(a) The Companys 1991 Stock Option Plan for
Non-Employee Directors(6)
|
|
|
|
|
(b) Amendment No. 1 dated December 7, 2000(8)
|
|
10
|
.5
|
|
The Companys 2001 Non-Employee Directors Stock Plan, as
amended(13)
|
|
10
|
.6
|
|
Summary of Compensation for Non-Management Members of the Board
of Directors of The Timberland Company, as approved on
December 2, 2004(12)
|
83
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.7
|
|
The Timberland Company 2004 Executive Long Term Incentive
Program(13)
|
|
10
|
.8
|
|
Amendment to The Timberland Company 2004 Executive Long Term
Incentive Program(13)
|
|
10
|
.9
|
|
Amendment to The Timberland Company 2004 Executive Long Term
Incentive Program dated November 30, 2005(14)
|
|
10
|
.11
|
|
The Timberland Company 2004 Long Term Incentive Program for
Kenneth P. Pucker(13)
|
|
10
|
.12
|
|
Amendment to The Timberland Company 2004 Long Term Incentive
Program for Kenneth P. Pucker(13)
|
|
10
|
.13
|
|
The Timberland Company 2005 Long Term Incentive Program for
Kenneth P. Pucker(4)
|
|
10
|
.14
|
|
The Timberland Company 2006 COO Incentive Program(2)
|
|
10
|
.15
|
|
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(11)
|
|
10
|
.16
|
|
First Amendment to the Second Amended and Restated Revolving
Credit Agreement, dated as of September 4, 2007 among The
Timberland Company, certain lending institutions listed therein
and Bank of America, N.A., as a lender and as administrative
agent.(16)
|
|
10
|
.17
|
|
The Timberland Company Deferred Compensation Plan, as amended,
filed herewith
|
|
10
|
.18
|
|
Change of Control Severance Agreement(8)
|
|
10
|
.19
|
|
The Timberland Company 2006 SmartWool Integration Bonus
Program(14)
|
|
10
|
.20
|
|
Separation Agreement between The Timberland Company and Kenneth
P. Pucker dated February 7, 2007(15)
|
|
10
|
.21
|
|
The Timberland Company 2007 Executive Long Term Incentive
Program(17)
|
|
10
|
.22
|
|
The Timberland Company 2007 Incentive Plan(18)
|
|
10
|
.23
|
|
Summary of Timberland Key Employee Engagement Program, dated
February 28, 2007, filed herewith
|
|
(21
|
)
|
|
SUBSIDIARIES
|
|
21
|
.
|
|
List of subsidiaries of the registrant, filed herewith
|
|
(23
|
)
|
|
CONSENT OF EXPERTS AND COUNSEL
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm,
Deloitte & Touche LLP, filed herewith
|
|
(31
|
)
|
|
RULE 13a-14(a)/15d
14(a) CERTIFICATIONS
|
|
31
|
.1
|
|
Principal Executive Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
|
|
31
|
.2
|
|
Principal Financial Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
|
|
(32
|
)
|
|
SECTION 1350 CERTIFICATIONS
|
|
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
|
|
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
|
We agree to furnish to the Commission, upon its request, copies
of any omitted schedule or exhibit to any Exhibit filed herewith.
|
|
|
(1)
|
|
Filed as an exhibit to Registration Statement on
Form S-1,
numbered
33-14319,
and incorporated herein by reference.
|
|
(2)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended September 29, 2006, and
incorporated herein by reference.
|
|
(3)
|
|
Filed on June 21, 1995, as an exhibit to Registration
Statement on
Form S-8,
numbered
33-60457,
and incorporated herein by reference.
|
84
|
|
|
(4)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on March 7, 2005 and incorporated herein by reference.
|
|
(5)
|
|
Filed on June 21, 1995, as an exhibit to Registration
Statement on
Form S-8,
numbered
33-60459,
and incorporated herein by reference.
|
|
(6)
|
|
Filed on August 18, 1992, as an exhibit to Registration
Statement on
Form S-8,
numbered
33-50998,
and incorporated herein by reference.
|
|
(7)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on March 2, 2007, and incorporated herein by
reference.
|
|
(8)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000, and
incorporated herein by reference.
|
|
(9)
|
|
Filed on October 26, 2001, as an exhibit to Registration
Statement on
Form S-8,
numbered
333-72248,
and incorporated herein by reference.
|
|
(10)
|
|
Filed on January 15, 2004, as an exhibit to Registration
Statement on
Form S-8,
numbered
333-111949,
and incorporated herein by reference.
|
|
(11)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended June 30, 2006, and incorporated
herein by reference.
|
|
(12)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on December 7, 2004, and incorporated herein by
reference.
|
|
(13)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, as amended,
and incorporated herein by reference.
|
|
(14)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005, and
incorporated herein by reference.
|
|
(15)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 (filed on
March 1, 2007) and incorporated herein by reference.
|
|
(16)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended September 29, 2007, and
incorporated herein by reference.
|
|
(17)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended March 31, 2007, and
incorporated herein by reference.
|
|
(18)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on March 2, 2007, and incorporated herein by
reference.
|
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
February 29, 2008
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By:
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/s/
JEFFREY
B. SWARTZ
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Jeffrey B. Swartz
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/
SIDNEY
W. SWARTZ
Sidney
W. Swartz
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Chairman of the Board and Director
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February 29, 2008
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/s/
JEFFREY
B. SWARTZ
Jeffrey
B. Swartz
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President, Chief Executive Officer and Director (Principal
Executive Officer)
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February 29, 2008
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/s/
JOHN
CRIMMINS
John
Crimmins
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Chief Financial Officer, Vice President Finance, and Chief
Accounting Officer
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February 29, 2008
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/s/
IRENE
M. ESTEVES
Irene
M. Esteves
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Director
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February 29, 2008
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/s/
JOHN
A. FITZSIMMONS
John
A. Fitzsimmons
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Director
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February 29, 2008
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/s/
VIRGINIA
H. KENT
Virginia
H. Kent
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Director
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February 29, 2008
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/s/
KENNETH
T. LOMBARD
Kenneth
T. Lombard
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Director
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February 29, 2008
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/s/
EDWARD
W. MONEYPENNY
Edward
W. Moneypenny
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Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/
PETER
R. MOORE
Peter
R. Moore
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/
BILL
SHORE
Bill
Shore
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/
TERDEMA
L. USSERY, II
Terdema
L. Ussery, II
|
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Director
|
|
February 29, 2008
|
86
SCHEDULE II
THE
TIMBERLAND COMPANY
VALUATION
AND QUALIFYING ACCOUNTS
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Additions
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Deductions
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Balance at
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|
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Charged to
|
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Charged
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Write-Offs,
|
|
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Balance at
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|
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Beginning
|
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Costs and
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to Other
|
|
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Net of
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|
|
End of
|
|
Description
|
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of Period
|
|
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Expenses
|
|
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Accounts
|
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Recoveries
|
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Period
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(Dollars in thousands)
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Allowance for doubtful accounts:
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Years ended:
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December 31, 2007
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$
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12,493
|
|
|
$
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7,406
|
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|
$
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$
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5,137
|
|
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$
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14,762
|
|
December 31, 2006
|
|
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8,755
|
|
|
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5,661
|
|
|
|
|
|
|
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1,923
|
|
|
|
12,493
|
|
December 31, 2005
|
|
|
8,927
|
|
|
|
801
|
|
|
|
|
|
|
|
973
|
|
|
|
8,755
|
|
87
Timberland, the Tree Design logo, 24/7 Comfort Suspension, the
24/7 Comfort Suspension logo, the PRO 24/7 logo, Air Raider,
Amorphic Suspension, Balm Proofer, Boot Sauce, B.S.F.P.,
Cast-Bond, ClimatePath, Coconut Honeycomb Tech, Comforia, the
Comforia logo, Earthkeepers, EasyDry, Endoskeleton, Ergomorphic,
Ever-Guard, Follow Your Path, Free to GoLite, GoLite, the GoLite
logo, Green Index, Gripstick, GSR, Howies, Independent
Suspension Network, IntraMet, IPATH, the IPATH logos, ISN, the
ISN logo, Isomorphic Suspension, Jackson Mountain, Ladder Lock,
Made To Work, Make it better, Measure Up, Miōn, the
Miōn logo, NEOform, Path of Service, PowerFit, the Powerfit
logo, PreciseFit, the PreciseFit logo, PRO 24/7, PRO 24/7
Comfort Suspension, QuadCut, Renewbuck, SafeGrip, Smart Comfort,
the Smart Comfort logo, SmartWool, the SmartWool logo,
SmartPrint, Leave My SmartPrint, Smart Basket, Start Small,
Think Big, Splash Blaster, the Splash Blaster logo, TBL,
Timberland Boot Company, Timberland PRO, the PRO logo, TiTAN,
Trail Grip, Weathergear, Waximum, and Whole Body Stability, are
trademarks of The Timberland Company or its affiliated
companies. Gore-Tex is a trademark of W.L. Gore &
Associates, Inc. Ströbel is a trademark of Ströbel Und
Söhne GmbH & Co. Thinsulate and Scotchgard are
trademarks of 3M.
©
2008 The Timberland Company
All Rights Reserved
EXHIBIT INDEX
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|
|
|
|
Exhibit
|
|
Description
|
|
|
(3
|
)
|
|
ARTICLES OF INCORPORATION AND BY-LAWS
|
|
3
|
.1
|
|
(a) Restated Certificate of Incorporation dated
May 14, 1987(8)
|
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|
|
(b) Certificate of Amendment of Restated Certificate of
Incorporation dated May 22, 1987(8)
|
|
|
|
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(c) Certificate of Ownership merging The Nathan Company
into The Timberland Company dated July 31, 1987(8)
|
|
|
|
|
(d) Certificate of Amendment of Restated Certificate of
Incorporation dated June 14, 2000(8)
|
|
|
|
|
(e) Certificate of Amendment of Restated Certificate of
Incorporation dated September 27, 2001(9)
|
|
3
|
.2
|
|
Amended and restated By-Laws, dated February 28, 2007(7)
|
|
(4
|
)
|
|
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES (See also Exhibits 3.1 and 3.2)
|
|
4
|
.1
|
|
Revised specimen stock certificate for shares of the
Companys Class A Common Stock(15)
|
|
(10
|
)
|
|
MATERIAL CONTRACTS
|
|
10
|
.1
|
|
Agreement dated as of August 29, 1979 between The
Timberland Company and Sidney W. Swartz(1)
|
|
10
|
.2
|
|
(a) The Companys 1987 Stock Option Plan, as amended(3)
|
|
|
|
|
(b) The Companys 1997 Incentive Plan, as amended(10)
|
|
10
|
.3
|
|
The Companys 1991 Employee Stock Purchase Plan, as
amended(5)
|
|
10
|
.4
|
|
(a) The Companys 1991 Stock Option Plan for
Non-Employee Directors(6)
|
|
|
|
|
(b) Amendment No. 1 dated December 7, 2000(8)
|
|
10
|
.5
|
|
The Companys 2001 Non-Employee Directors Stock Plan, as
amended(13)
|
|
10
|
.6
|
|
Summary of Compensation for Non-Management Members of the Board
of Directors of The Timberland Company, as approved on
December 2, 2004(12)
|
|
10
|
.7
|
|
The Timberland Company 2004 Executive Long Term Incentive
Program(13)
|
|
10
|
.8
|
|
Amendment to The Timberland Company 2004 Executive Long Term
Incentive Program(13)
|
|
10
|
.9
|
|
Amendment to The Timberland Company 2004 Executive Long Term
Incentive Program dated November 30, 2005(14)
|
|
10
|
.11
|
|
The Timberland Company 2004 Long Term Incentive Program for
Kenneth P. Pucker(13)
|
|
10
|
.12
|
|
Amendment to The Timberland Company 2004 Long Term Incentive
Program for Kenneth P. Pucker(13)
|
|
10
|
.13
|
|
The Timberland Company 2005 Long Term Incentive Program for
Kenneth P. Pucker(4)
|
|
10
|
.14
|
|
The Timberland Company 2006 COO Incentive Program(2)
|
|
10
|
.15
|
|
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(11)
|
|
10
|
.16
|
|
First Amendment to the Second Amended and Restated Revolving
Credit Agreement, dated as of September 4, 2007 among The
Timberland Company, certain lending institutions listed therein
and Bank of America, N.A., as a lender and as administrative
agent.(16)
|
|
10
|
.17
|
|
The Timberland Company Deferred Compensation Plan, as amended,
filed herewith
|
|
10
|
.18
|
|
Change of Control Severance Agreement(8)
|
|
10
|
.19
|
|
The Timberland Company 2006 SmartWool Integration Bonus
Program(14)
|
|
10
|
.20
|
|
Separation Agreement between The Timberland Company and Kenneth
P. Pucker dated February 7, 2007(15)
|
|
10
|
.21
|
|
The Timberland Company 2007 Executive Long Term Incentive
Program(17)
|
|
10
|
.22
|
|
The Timberland Company 2007 Incentive Plan(18)
|
|
10
|
.23
|
|
Summary of Timberland Key Employee Engagement Program, dated
February 28, 2007, filed herewith
|
|
(21
|
)
|
|
SUBSIDIARIES
|
|
21
|
.
|
|
List of subsidiaries of the registrant, filed herewith
|
|
(23
|
)
|
|
CONSENT OF EXPERTS AND COUNSEL
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm,
Deloitte & Touche LLP, filed herewith
|
|
(31
|
)
|
|
RULE 13a-14(a)/15d
14(a) CERTIFICATIONS
|
|
31
|
.1
|
|
Principal Executive Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
|
|
31
|
.2
|
|
Principal Financial Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
(32
|
)
|
|
SECTION 1350 CERTIFICATIONS
|
|
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
|
|
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
|
We agree to furnish to the Commission, upon its request, copies
of any omitted schedule or exhibit to any Exhibit filed herewith.
|
|
|
(1)
|
|
Filed as an exhibit to Registration Statement on
Form S-1,
numbered
33-14319,
and incorporated herein by reference.
|
|
(2)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended September 29, 2006, and
incorporated herein by reference.
|
|
(3)
|
|
Filed on June 21, 1995, as an exhibit to Registration
Statement on
Form S-8,
numbered
33-60457,
and incorporated herein by reference.
|
|
(4)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on March 7, 2005 and incorporated herein by reference.
|
|
(5)
|
|
Filed on June 21, 1995, as an exhibit to Registration
Statement on
Form S-8,
numbered
33-60459,
and incorporated herein by reference.
|
|
(6)
|
|
Filed on August 18, 1992, as an exhibit to Registration
Statement on
Form S-8,
numbered
33-50998,
and incorporated herein by reference.
|
|
(7)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on March 2, 2007, and incorporated herein by
reference.
|
|
(8)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000, and
incorporated herein by reference.
|
|
(9)
|
|
Filed on October 26, 2001, as an exhibit to Registration
Statement on
Form S-8,
numbered
333-72248,
and incorporated herein by reference.
|
|
(10)
|
|
Filed on January 15, 2004, as an exhibit to Registration
Statement on
Form S-8,
numbered
333-111949,
and incorporated herein by reference.
|
|
(11)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended June 30, 2006, and incorporated
herein by reference.
|
|
(12)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on December 7, 2004, and incorporated herein by
reference.
|
|
(13)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, as amended,
and incorporated herein by reference.
|
|
(14)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005, and
incorporated herein by reference.
|
|
(15)
|
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 (filed on
March 1, 2007) and incorporated herein by reference.
|
|
(16)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended September 29, 2007, and
incorporated herein by reference.
|
|
(17)
|
|
Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the fiscal period ended March 31, 2007, and
incorporated herein by reference.
|
|
(18)
|
|
Filed as an exhibit to the Current Report on
Form 8-K
filed on March 2, 2007, and incorporated herein by
reference.
|
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