Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the financial condition
and results of operations of The Timberland Company and its subsidiaries ("we",
"our", "us", "its", "Timberland" or the "Company"), as well as our liquidity and
capital resources. The discussion, including known trends and uncertainties
identified by management, should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and related notes included
in this Quarterly Report on Form 10-Q, as
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well as our audited consolidated financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended December 31, 2008.
Included herein are discussions and reconciliations of total Company, Europe and
Asia revenue changes to constant dollar revenue changes. Constant dollar revenue
changes, which exclude the impact of changes in foreign exchange rates, are not
Generally Accepted Accounting Principle (''GAAP'') performance measures. The
difference between changes in reported revenue (the most comparable GAAP
measure) and constant dollar revenue changes is the impact of foreign currency
exchange rate fluctuations. We provide constant dollar revenue changes for total
Company, Europe and Asia results because we use the measure to understand the
underlying growth rate of revenue excluding the impact of items that are not
under management's 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 Company's revenue. This limitation is best addressed by using constant
dollar revenue changes in combination with the GAAP numbers.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to sales returns and allowances, realization of
outstanding accounts receivable, the carrying value of inventories, derivatives,
other contingencies, impairment of assets, incentive compensation accruals,
share-based compensation and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Historically, actual results have not been
materially different from our estimates. Because of the uncertainty inherent in
these matters, actual results could differ from the estimates used in, or that
result from, applying our critical accounting policies. Our significant
accounting policies are described in Note 1 to the Company's consolidated
financial statements included in Part II, Item 8 of our Annual Report on Form
10-K for the year ended December 31, 2008. Our estimates, assumptions and
judgments involved in applying the critical accounting policies are described in
Part II, Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations, of our Annual Report on Form 10-K for the year ended
December 31, 2008.
Overview
Our principal strategic goal is to become the authentic outdoor brand of choice
globally. We continue to develop a diverse portfolio of footwear, apparel and
accessories that reinforces the functional performance, benefits and classic
styling that consumers have come to expect from our brand. We sell our products
to consumers who embrace an outdoor-inspired lifestyle through high-quality
distribution channels, including our own retail stores, which reinforce the
premium positioning of the Timberlandâ brand.
To deliver against our long-term goals, we are focused on driving progress on
key strategic fronts. These include enhancing our leadership position in our
core footwear business, capturing the opportunity that we see for
outdoor-inspired apparel, extending enterprise reach through 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.
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A summary of our first quarter of 2009 financial performance, compared to the
first quarter of 2008, follows:
• First quarter revenue decreased 12.9%, or 6.5% on a constant dollar basis,
to $296.6 million, compared to $340.4 million in the prior year period.
• Gross margin decreased from 46.3% to 46.1%.
• Operating expenses were $118.5 million, down 11.8% from $134.4 million in
the prior year period.
• We recorded operating income of $18.2 million in the first quarter of 2009,
compared to $23.2 million in the prior year period.
• Net income was $15.9 million in the first quarter of 2009, compared to
$18.0 million in the first quarter of 2008.
• Diluted earnings per share decreased from $0.30 in the first quarter of 2008
to $0.27 in the first quarter of 2009.
• Cash at the end of the quarter was $159.2 million with no debt outstanding.
The Company anticipates that 2009 will continue to be challenging due to the
uncertainty around consumer spending patterns and the financial health of the
retail industry. Given the volatile nature of current economic conditions, the
Company believes there is not sufficient visibility to set expectations for the
performance of the business.
Results of Operations for the Quarter Ended April 3, 2009 as Compared to the
Quarter Ended March 28, 2008
Revenue
Consolidated revenue of $296.6 million for the first quarter of 2009 decreased
$43.8 million, or 12.9%, compared to the first quarter of 2008, driven by
declines in Timberland® apparel and casual footwear, and impacted by the
strengthening of the U.S. dollar. On a constant dollar basis, consolidated
revenues were down 6.5%. North America revenue totaled $119.8 million for the
first quarter of 2009, a 13.0% decline from the first quarter of 2008. Europe
revenues were $140.0 million in the first quarter of 2009, a 15% decrease over
the same period in 2008. Europe revenues were down 1.7% as compared to the prior
year quarter on a constant dollar basis. Asia revenues were $36.8 million for
the first quarter of 2009, a decrease of 2.9% from the same period in 2008, but
declined 6.2% on a constant dollar basis.
Segments Review
We have three reportable business segments (see Note 7 to the unaudited
condensed consolidated financial statements contained herein): North America,
Europe and Asia.
North America revenues were $119.8 million in the first quarter of 2009, a
decrease of 13.0% as compared to the same period in 2008, driven by declines in
boots, as well as Timberland®apparel, due in part to anticipated declines from
the decision in 2008 to transition our North America wholesale apparel business
to a licensing arrangement. The continued weakness in these areas was partially
offset by growth in performance footwear and SmartWool apparel and accessories.
Within North America, our retail business had revenue declines of 8.5%, driven
by a 9.8% decrease in comparable store sales.
Europe recorded revenues of $140.0 million in the first quarter of 2009, which
was a 15.0% decrease from the first quarter of 2008. The impact of changes in
foreign exchange rates reduced Europe's revenues by 13.3%, masking growth in our
distributor businesses, as well as the German and Benelux regions. These
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growth areas were offset by continued weakness across the U.K. and Southern
Europe. Declines in casual footwear and Timberland® apparel were partially
offset by continued improvement in boots, as well as SmartWool apparel and
accessories.
In Asia, revenues decreased 2.9% to $36.8 million in the first quarter of 2009,
but declined 6.2% in constant dollars as compared to the first quarter of 2008,
due to softness in our retail business, primarily in apparel. Growth in Japan
was offset by declines in our distributor business, as well as lower revenues in
Hong Kong, Singapore and Taiwan.
Products
Worldwide footwear revenue was $211.6 million in the first quarter of 2009, down
$25.0 million, or 10.5%, from the first quarter of 2008, driven by global
declines in casual footwear and our boot business in North America. Outside
North America, we continue to see encouraging signs that our boot business is
strengthening. Worldwide apparel and accessories revenue fell 19.7% to $78.7
million in the first quarter of 2009. Timberland® apparel revenues decreased
worldwide, reflecting the strengthening of the U.S. dollar in Europe, softness
in international markets, and the impact of the transitioning of our North
America wholesale apparel business to a licensing arrangement. The Company
ceased sales of in-house Timberland® brand apparel in North America through the
wholesale channel during the second quarter of 2008. We saw double-digit growth
in SmartWool products, both in North America and in Europe. Royalty and other
revenue was $6.3 million in the first quarter of 2009, compared to $5.9 million
in the prior year quarter, primarily due to our wholesale apparel licensing
arrangement in North America, offset by a decline in licensed kids' apparel in
Europe.
Channels
Wholesale revenue was $218.6 million in the first quarter of 2009, a 14.4%
decrease compared to the prior year quarter. Continued softness in the wholesale
markets was the primary driver of sales declines in men's casual footwear
globally, and performance footwear in Europe and Asia. Declines in Timberland®
brand apparel were due in part to the transition of the North American wholesale
apparel business to a licensing arrangement.
Retail revenues decreased 8.1% to $78.0 million in the first quarter of 2009,
driven by unfavorable foreign exchange rate impacts and a worldwide retail
market that continues to be difficult, especially in North America. Overall,
comparable store sales were down 1.6% on a global basis as compared to the first
quarter of 2008, with favorable comparable store results in Europe and Asia
being offset by declines in our North America outlet stores. We had 213 stores,
shops and outlets worldwide at the end of the first quarter of 2009 compared to
220 at the end of the first quarter of 2008.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 46.1% for the first
quarter of 2009, 20 basis points lower than in the first quarter of 2008. The
impact of higher product costs was partially offset by favorable changes in
business unit and channel mix.
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
$13.9 million and $19.5 million for the first quarters of 2009 and 2008,
respectively. The decrease was primarily driven by lower costs associated with
our wholesale apparel business as we transitioned to a licensing arrangement in
2008, as well as reduced footwear sourcing and logistics costs as a result of a
decrease in volume.
Operating Expense
Operating expense for the first quarter of 2009 was $118.5 million, a decrease
of $15.9 million, or 11.8%,
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over the first quarter of 2008. The decrease was driven primarily by a
$16.1 million decrease in selling, general and administrative expenses,
partially offset by an intangible asset impairment charge of $0.9 million.
Overall, changes in foreign exchange rates reduced operating expense by
approximately $8.6 million in the first quarter of 2009.
Selling expense was $92.3 million in the first quarter of 2009, a decrease of
$13.8 million, or 13.1%, over the same period in 2008. The decrease in selling
expense was due primarily to reduced sales, marketing and distribution costs in
both our retail and wholesale businesses as a result of lower volume due to
softness in the markets, a reduced cost base due to the transitioning of our
North American wholesale apparel business to a licensing arrangement, the
exiting of certain specialty brands in 2008, and a reduction in share-based and
incentive compensation costs. Expenses also benefited from changes in foreign
exchange rates.
We include the costs of physically managing inventory (warehousing and handling
costs) in selling expense. These costs totaled $9.2 million and $9.9 million in
the first quarters of 2009 and 2008, respectively.
In the first quarters of 2009 and 2008, we recorded $0.6 million and
$0.8 million, respectively, of reimbursed shipping expenses within revenues and
the related shipping costs within selling expense. Shipping costs are included
in selling expense and were $4.7 million and $5.2 million for the quarters ended
April 3, 2009 and March 28, 2008, respectively.
Advertising expense, which is included in selling expense, was $4.6 million and
$5.1 million in the first quarter of 2009 and 2008, respectively. Advertising
expense includes co-op advertising costs, consumer-facing advertising costs such
as print, television and internet campaigns, production costs including agency
fees, and catalog costs. Our continued investment in global marketing and
branding initiatives, primarily through consumer-facing advertising programs,
was offset by reduced spending in co-op advertising. Advertising costs are
expensed at the time the advertising is used, predominantly in the season that
the advertising costs are incurred. Prepaid advertising recorded on our
unaudited condensed consolidated balance sheets as of April 3, 2009 and
March 28, 2008 was $2.3 million and $0.3 million, respectively. These
investments demonstrate our continued commitment to strengthen our premium brand
position despite adverse economic conditions.
General and administrative expense for the first quarter of 2009 was
$25.4 million, down 8.2% compared to the $27.7 million reported in the first
quarter of 2008, driven by reductions in incentive and share-based compensation
costs, the savings associated with ongoing actions taken to streamline our
global operations, and the benefits of changes in foreign exchange rates.
Total operating expense in the first quarter of 2009 also included a charge of
$0.9 million to reflect the impairment of a trademark, and restructuring credits
of $0.1 million. We recorded net restructuring charges of $0.6 million in the
first quarter of 2008.
Operating Income/(Loss)
We recorded operating income of $18.2 million in the first quarter of 2009,
compared to operating income of $23.2 million in the prior year period.
Operating income included an intangible asset impairment charge of $0.9 million
and restructuring credits of $0.1 million in the first quarter of 2009, compared
to restructuring charges of $0.6 million in the first quarter of 2008.
Operating income for our North America segment was $15.0 million, a decrease of
29.5% from the first quarter of 2008. The decrease was driven by a 330 basis
point decline in gross margin, due primarily to increased product costs, the
write-off of inventory and higher than anticipated sales returns and allowances,
partially offset by a 14.2% decrease in operating expenses principally due to
decreases in selling, marketing and distribution expenses as a result of lower
volume. Savings associated with the
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exiting of certain specialty brands in 2008 were offset by fixed asset
write-offs related to our e-commerce business and underperforming retail stores.
Timberland's European segment recorded operating income of $30.1 million in the
first quarter of 2009, compared to operating income of $33.1 million in the
first quarter of 2008, principally due to a 14.5% decrease in gross profit, in
line with a 15.0% decrease in revenue. This decrease was partially offset by a
18.1% decrease in operating expenses as a result of reduced agency, marketing
and distribution costs in light of lower sales volume and the impact of changes
in foreign exchange rates, partially offset by a charge for the impairment of a
trademark.
We had operating income in our Asia segment of $1.8 million for the first
quarter of 2009, compared to operating income of $0.7 million for the first
quarter of 2008, driven by reduced operating expenses, primarily in our retail
business.
Our Unallocated Corporate expenses, which include central support and
administrative costs not allocated to our business segments, decreased 9.8% to
$28.8 million, which reflects the benefit from the revaluation of the Company's
existing inventory to new standard prices that is not allocated to the Company's
reportable segments.
Other Income/(Expense) and Taxes
Interest income was $0.4 million and $0.9 million in the first quarters of 2009
and 2008, respectively, reflecting lower interest rates. Interest expense, which
is comprised of fees related to the establishment and maintenance of our
revolving credit facility and interest paid on short-term borrowings, was
$0.1 million and $0.3 million in the first quarters of 2009 and 2008,
respectively.
Other income/(expense), net, included foreign exchange gains/(losses) of $(0.3)
million and $5.1 million in the first quarters of 2009 and 2008, respectively,
resulting from changes in the fair value of financial derivatives, specifically
forward contracts not designated as cash flow hedges, and the currency gains and
losses incurred on the settlement of local currency denominated receivables and
payables. These results were driven by the volatility of exchange rates within
the first quarters of 2009 and 2008 and should not be considered indicative of
expected future results.
The effective income tax rate for the first quarter of 2009 was 11.0%. The rate
was impacted by the release of approximately $6.4 million in specific tax
reserves due to the closure of certain audits in the first quarter of 2009, and
the geographic mix of our profits. The effective income tax rate for the first
quarter of 2008 was 39.0%.
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Reconciliation of Total Company, Europe and Asia Revenue Increases/(Decreases)
To Constant Dollar Revenue Increases/(Decreases)
Total Company Revenue Reconciliation:
For the Quarter
Ended April 3, 2009
$ Millions
Change % Change
Revenue decrease (GAAP) $ (43.8 ) -12.9 %
Decrease due to foreign exchange rate changes (21.6 ) -6.4 %
Revenue decrease in constant dollars $ (22.2 ) -6.5 %
Europe Revenue Reconciliation:
For the Quarter
Ended April 3, 2009
$ Millions
Change % Change
Revenue decrease (GAAP) $ (24.7 ) -15.0 %
Decrease due to foreign exchange rate changes (21.9 ) -13.3 %
Revenue decrease in constant dollars $ ( 2.8 ) -1.7 %
Asia Revenue Reconciliation:
For the Quarter
Ended April 3, 2009
$ Millions
Change % Change
Revenue decrease (GAAP) $ (1.1 ) -2.9 %
Increase due to foreign exchange rate changes 1.3 3.3 %
Revenue decrease in constant dollars $ (2.4 ) -6.2 %
|
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, 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 management's direct
control, such as changes in foreign exchange rates.
Accounts Receivable and Inventory
Accounts receivable decreased 14.6% to $172.3 million as of April 3, 2009,
compared with $201.8 million at March 28, 2008. Days sales outstanding were
52 days as of April 3, 2009, compared with 53 days as of March 28, 2008.
Wholesale days sales outstanding were 58 days and 60 days for the first quarters
of 2009 and 2008, respectively. We maintained our collection performance despite
the difficult economic environment and lower sales.
Inventory decreased 9.7% to $162.8 million as of April 3, 2009, compared with
$180.2 million as of March 28, 2008, reflecting continued discipline against
excess inventory.
Liquidity and Capital Resources
Net cash used by operations for the first quarter of 2009 was $44.3 million,
compared with $2.8 million of cash provided by operations for the first quarter
of 2008. The cash usage was due primarily to increased usage of cash for
accounts payable, associated with the timing of inventory payments, and accrued
expenses, including incentive compensation for 2008 results paid in the first
quarter of 2009, as compared to minimal incentive compensation in the prior year
period.
Net cash used for investing activities was $4.4 million in the first quarter of
2009, compared with $1.9 million in the first quarter of 2008. Cash used for the
acquisition of Glaudio, net of cash acquired, was $1.5 million in the first
quarter of 2009. Capital spending totaled $2.8 million in the first quarter of
2009, compared with $4.1 million in the first quarter of 2008.
Net cash used by financing activities was $8.5 million in the first quarter of
2009, compared with $9.6 million in the first quarter of 2008. We had no
short-term borrowings as of April 3, 2009 or March 28, 2008. Cash flows for
financing activities reflected share repurchases of $9.1 million in the first
quarter of 2009, compared with $10.2 million in the first quarter of 2008.
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We are exposed to the credit risk of those parties with which we do business
including counterparties on our derivative contracts and our customers.
Derivative instruments expose us to credit and market risk. The market risk
associated with these instruments resulting from currency exchange movements is
expected to offset the market risk of the underlying transactions being hedged.
We do not believe there is a significant risk of loss in the event of
non-performance by the counterparties associated with these instruments because
these transactions are executed with a group of major financial institutions and
have varying maturities through January 2010. As a matter of policy, we enter
into these contracts only with counterparties having a minimum investment-grade
or better credit rating. Credit risk is managed through the continuous
monitoring of exposures to such counterparties.
Additionally, consumer spending is being affected by the current macro-economic
environment, particularly the disruption of the credit and stock markets and
increased unemployment. Continued deterioration in the markets and economic
conditions generally could adversely impact our customers and their ability to
access credit.
We may utilize our committed and uncommitted lines of credit to fund our
seasonal working capital needs. We have not experienced any restrictions on the
availability of these lines and the adverse capital and credit market conditions
are not expected to significantly affect our ability to meet our liquidity
needs.
We have an unsecured committed revolving credit agreement with a group of banks,
which matures on June 2, 2011 ("Agreement"). The Agreement provides for
$200 million of committed borrowings, of which up to $125 million may be used
for letters of credit. 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 1.0% at April 3, 2009), plus an
applicable margin based on a fixed-charge coverage grid of between 13.5 and 47.5
basis points that is adjusted quarterly. As of April 3, 2009, the applicable
margin under the facility was 47.5 basis points. We pay a utilization fee of an
additional 5 basis points if our outstanding borrowings under the facility
exceed $100 million. We also pay a commitment fee of 6.5 to 15 basis points per
annum on the total commitment, based on a fixed-charge coverage grid that is
adjusted quarterly. As of April 3, 2009, the commitment fee was 15 basis points.
The Agreement places certain limitations on additional debt, stock repurchases,
acquisitions, and the amount of dividends we may pay, and includes certain other
financial and non-financial covenants. The primary financial covenants relate to
maintaining a minimum fixed-charge coverage ratio of 2.25:1 and a maximum
leverage ratio of 2:1. We measure compliance with the financial and
non-financial covenants and ratios as required by the terms of the Agreement on
a fiscal quarter basis.
We have uncommitted lines of credit available from certain banks which totaled
$30 million at April 3, 2009. Any borrowings under these lines would be at
prevailing money market rates. Further, we have an uncommitted letter of credit
facility of $80 million to support inventory purchases. These arrangements may
be terminated at any time at the option of the banks or at our option.
As of April 3, 2009 and March 28, 2008, we had no borrowings outstanding under
any of our credit facilities. The amount of peak borrowing under our facilities
in 2008 was approximately $20.0 million, and occurred during the fourth quarter
of 2008 to fund our seasonal working capital requirements. In 2009, we expect to
utilize our facilities in a similar fashion to 2008, primarily to fund seasonal
working capital requirements in the latter half of the year.
Management believes that our operating costs, capital requirements and funding
for our share repurchase program for the balance of 2009 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
financing. However, as discussed in the sections entitled "Cautionary Statements
for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995" on page 2 of our Annual Report on Form 10-K for
the year ended December
. . .
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