1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 1998
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 1-9548
------
The Timberland Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 02-0312554
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
200 Domain Drive, Stratham, New Hampshire 03885
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 772-9500
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On July 31, 1998, 9,132,261 shares of the registrant's Class A Common Stock were
outstanding and 2,338,162 shares of the registrant's Class B Common Stock were
outstanding.
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THE TIMBERLAND COMPANY
FORM 10-Q
TABLE OF CONTENTS
Page(s)
-------
PART I FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets - 1-2
June 26, 1998 and December 31, 1997
Condensed Consolidated Statements of Income - 3
For the three and six months ended June 26, 1998
and June 27, 1997
Condensed Consolidated Statements of Cash Flows - 4
For the six months ended June 26, 1998 and
June 27, 1997
Notes to Condensed Consolidated Financial Statements 5-6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II OTHER INFORMATION 10-11
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Form 10-Q
Page 1
PART I FINANCIAL INFORMATION
THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars in Thousands)
(Unaudited)
June 26, December 31,
1998 1997
--------- ------------
Current assets
Cash and equivalents $ 24,757 $ 98,771
Accounts receivable, net of allowance for doubtful
accounts of $3,901 at June 26, 1998 and $3,742
at December 31, 1997 94,815 75,793
Inventory 199,956 142,613
Prepaid expense 11,797 12,856
Deferred and refundable income taxes 12,358 11,973
-------- --------
Total current assets 343,683 342,006
-------- --------
Property, plant and equipment 123,224 116,503
Less accumulated depreciation and amortization (69,565) (63,593)
-------- --------
Net property, plant and equipment 53,659 52,910
-------- --------
Excess of cost over fair value of net assets
acquired, net 20,060 20,902
Other assets, net 4,085 4,185
-------- --------
$421,487 $420,003
======== ========
See accompanying notes to condensed consolidated financial statements.
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Form 10-Q
Page 2
THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
June 26, December 31,
1998 1997
-------- ------------
Current liabilities
Accounts payable $ 29,497 $ 20,390
Accrued expense
Payroll and related 16,535 28,233
Interest and other 34,752 32,786
Income taxes payable 7,697 17,686
-------- --------
Total current liabilities 88,481 99,095
-------- --------
Long-term debt 100,000 100,000
Deferred income taxes 6,113 6,013
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);
30,000,000 shares authorized; 9,148,776 shares issued
at June 26, 1998 and 8,765,013 shares at December 31, 1997 91 88
Class B Common Stock, $.01 par value (10 votes per share); convertible
into Class A shares on a one-for-one basis; 15,000,000 shares
authorized; 2,338,162 shares issued at June 26, 1998 and 2,605,432
shares at December 31, 1997 23 26
Additional paid-in capital 71,543 68,568
Retained earnings 157,187 147,921
Accumulated other comprehensive loss -
cumulative translation adjustment (1,838) (1,595)
Less treasury stock at cost, 17,369 shares at June 26,
1998 and December 31, 1997 (113) (113)
-------- --------
226,893 214,895
-------- --------
$421,487 $420,003
======== ========
See accompanying notes to condensed consolidated financial statements.
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Form 10-Q
Page 3
THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
For the For the
Three Months Ended Six Months Ended
------------------------ -----------------------
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
Revenue $144,741 $132,180 $307,798 $282,864
Cost of goods sold 87,310 80,325 183,422 169,395
-------- -------- -------- --------
Gross profit 57,431 51,855 124,376 113,469
-------- -------- -------- --------
Operating expense
Selling 41,062 35,388 83,467 74,623
General and administrative 11,463 12,106 23,599 23,569
Amortization of goodwill 421 421 842 842
-------- -------- -------- --------
Total operating expense 52,946 47,915 107,908 99,034
-------- -------- -------- --------
Operating income 4,485 3,940 16,468 14,435
-------- -------- -------- --------
Other expense (income)
Interest expense 2,337 3,553 4,571 8,130
Other, net (648) (409) (1,730) (628)
-------- -------- -------- --------
Total other expense 1,689 3,144 2,841 7,502
-------- -------- -------- --------
Income before income taxes 2,796 796 13,627 6,933
-------- -------- -------- --------
Provision for income taxes 895 239 4,361 2,080
-------- -------- -------- --------
Net income $ 1,901 $ 557 $ 9,266 $ 4,853
======== ======== ======== ========
Basic earnings per share $ .17 $ .05 $ .81 $ .43
======== ======== ======== ========
Average shares outstanding 11,459 11,262 11,419 11,221
======== ======== ======== ========
Diluted earnings per share $ .16 $ .05 $ .78 $ .42
======== ======== ======== ========
Average shares outstanding 11,920 11,735 11,867 11,651
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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Form 10-Q
Page 4
THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the
Six Months Ended
-------------------------
June 26, June 27,
1998 1997
-------- ---------
Cash flows from operating activities:
Net income $ 9,266 $ 4,853
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Deferred income taxes (285) (1,926)
Depreciation and amortization 9,534 10,425
Increase (decrease) in cash from changes in working capital items:
Accounts receivable (19,147) 13,894
Inventory (57,358) (41,451)
Prepaid expense 1,047 (279)
Accounts payable 9,128 12,527
Accrued expense (10,011) (9,358)
Income taxes (9,998) (1,689)
-------- --------
Net cash used by operating activities (67,824) (13,004)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment, net (8,528) (8,694)
Other, net (653) (2,323)
-------- --------
Net cash used by investing activities (9,181) (11,017)
-------- --------
Cash flows from financing activities:
Payments on long-term debt -- (40,728)
Issuance of common stock 2,975 2,828
-------- --------
Net cash provided (used) by financing activities 2,975 (37,900)
-------- --------
Effect of exchange rate changes on cash 16 (363)
-------- --------
Net decrease in cash and equivalents (74,014) (62,284)
Cash and equivalents at beginning of period 98,771 93,336
-------- --------
Cash and equivalents at end of period $ 24,757 $ 31,052
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 4,603 $ 8,374
Income taxes paid 14,635 5,812
See accompanying notes to condensed consolidated financial statements.
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Form 10-Q
Page 5
THE TIMBERLAND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain the adjustments necessary to
present fairly the Company's financial position, results of operations and
changes in cash flows for the interim periods presented. Such adjustments
consisted of normal recurring items. The unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
2. The results of operations for the three and six months ended June 26, 1998
are not necessarily indicative of the results to be expected for the full
year. Historically, the Company's revenue has been more heavily weighted to
the second half of the year.
3. Inventory consisted of the following:
June 26, 1998 December 31, 1997
------------- -----------------
Raw materials $ 7,635 $ 8,010
Work-in-process 5,566 4,103
Finished goods 186,755 130,500
-------- --------
$199,956 $142,613
======== ========
4. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130 "Reporting Comprehensive Income" in 1998. SFAS No. 130 requires the
reporting of comprehensive income, which, in the case of the Company, is
the combination of reported net income and the change in the cumulative
translation adjustment which is a component of stockholders' equity. SFAS
No. 130 has no impact on the Company's reported net income. Comprehensive
income for the three months and six months ended June 26, 1998 and June 27,
1997 follows:
For the For the
Three Months Ended Six Months Ended
---------------------- --------------------
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
Net income $1,901 $ 557 $9,266 $ 4,853
Change in cumulative translation
adjustment (80) (418) (243) (3,776)
------ ----- ------ -------
Comprehensive income $1,821 $ 139 $9,023 $ 1,077
====== ===== ====== =======
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Form 10-Q
Page 6
THE TIMBERLAND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
5. Indebtedness
On April 30, 1998, the Company entered into a new unsecured committed
revolving credit agreement (the "Agreement") with a group of banks. The
Agreement, which replaced the Company's existing revolving credit facility,
expires on June 19, 2001 and provides for $100,000 of committed borrowings
of which up to $80,000 may be used for letters of credit. Under the terms
of the Agreement, the Company may borrow at interest rates based upon the
lenders' cost of funds. The Agreement provides for a facility fee of 0.20%
per annum on the full commitment, places limitations on the payment of
dividends and incurrence of additional debt, and also contains certain
other financial and operating covenants.
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Form 10-Q
Page 7
THE TIMBERLAND COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
RESULTS OF OPERATIONS
SECOND QUARTER 1998 COMPARED WITH SECOND QUARTER 1997
Revenue for the second quarter of 1998 was $144.7 million, an increase of $12.6
million, or 9.5%, compared with the $132.2 million reported for the second
quarter of 1997.
Domestic revenue for the second quarter of 1998 was $102.2 million, an increase
of $3.7 million, or 3.7%, from the same period in 1997. The increase was
attributable to footwear sales growth partially offset by a decrease in North
American apparel sales, as discussed below.
International revenue for the second quarter of 1998 was $42.5 million, an
increase of $8.9 million, or 26.4%, compared with the second quarter of 1997.
International revenue comprised 29.4% of total revenue for the second quarter of
1998, compared with 25.4% for the second quarter of 1997. Internationally, both
the footwear and apparel categories had increases over last year.
Footwear revenue for the second quarter of 1998 was $110.9 million, an increase
of $13.3 million, or 13.7%, from the same period in 1997. Domestically, footwear
sales in the Company's performance, classic boots, men's and kids' categories
outperformed last year's second quarter. In total, footwear unit sales increased
19.6% while average selling price decreased 5.0%. The decrease in average
selling price was due to the introduction of tiered pricing in many categories
and the delivery of more spring-appropriate footwear products which carry lower
average selling prices than fall-appropriate categories.
Revenue attributable to apparel and accessories decreased $3.3 million, or 9.9%,
to $29.8 million in the second quarter of 1998, compared with the same period in
1997. Much of this reduction was domestic and reflected fewer off-price sales.
European apparel and accessories sales increased 20.3%.
Worldwide revenue from Company-owned retail and factory stores for the second
quarter of 1998 was $33.9 million, compared with $32.4 million for the second
quarter of 1997. Total domestic retail and factory store sales increased 4.8%
compared with the same period in 1997. Comparable domestic retail and factory
store sales increased 7.4%.
Gross profit as a percentage of revenue for the second quarter of 1998 was
39.7%, an increase of 0.5 percentage points from the 39.2% reported for the
second quarter of 1997. The improvement in gross margin was due primarily to
fewer apparel and footwear off-price sales.
Operating expense was $52.9 million for the second quarter of 1998, up $5.0
million, or 10.5%, from the $47.9 million reported for the second quarter of
1997. Operating expense as a percentage of revenue for the second quarter of
1998 increased to 36.6% from 36.2% for the second quarter of 1997. The majority
of the dollar increase was due to both advertising and promotional expense and
to further expenditures in product development. General and administrative
expense decreased as a percentage of revenue compared to the second quarter of
1997.
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Form 10-Q
Page 8
Interest expense for the second quarter of 1998 decreased by $1.2 million to
$2.3 million from the comparable period in 1997 resulting from a significant
reduction in long-term debt throughout 1997.
The effective tax rate for the second quarter of 1998 was 32% compared with a
tax rate of 30% for the same period last year. The increase in the tax rate was
attributable to a decrease in the percentage of pre-tax income derived from the
Company's Puerto Rico based manufacturing operations.
SIX MONTHS ENDED JUNE 26, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 27, 1997
Revenue for the first six months of 1998 was $307.8 million, an increase of
$24.9 million, or 8.8% from the $282.9 million for the comparable period in
1997.
Gross profit as a percentage of revenue for the first six months of 1998 was
40.4%, compared with 40.1% for the comparable period in 1997. This improvement
was attributable to both fewer off-price sales and to the introduction of higher
margin products.
Operating expense for the first six months of 1998 increased by $8.9 million to
$107.9 million from $99.0 million for the comparable period in 1997. The
increase compared with the prior year was primarily attributable to increased
selling, marketing and product development expenditures.
Interest expense for the first six months of 1998 was $4.6 million, a decrease
of $3.6 million from the comparable period in 1997, due to a reduction in
long-term debt.
The effective tax rate for the first six months of 1998 was 32%, compared with a
tax rate of 30% for the same period last year. This increase is due to the same
factor cited in the second quarter discussion.
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Form 10-Q
Page 9
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during the first six months of 1998 was $67.8 million
compared with $13.0 million used during the same period in 1997. The use of cash
in 1998 was primarily due to inventory increasing $57.4 million and accounts
receivable increasing $19.1 million from year end 1997. The increase in
inventory is consistent with prior years as the Company prepares for fall
shipments. The increase in accounts receivable in 1998 as compared to the
decrease in 1997 was largely the result of a lower beginning receivable balance
in 1998 versus 1997. Days sales outstanding at both June 26, 1998 and June 27,
1997 were 59 days. Wholesale days sales outstanding decreased to 69 days at June
26, 1998 from 73 days at June 27, 1997. Inventory was $200.0 million at June 26,
1998, compared to $142.6 million at December 31, 1997 and $198.3 million at June
27, 1997. Inventory turns were 2.1 times for the second quarter of 1998,
compared with 1.8 times for the second quarter of 1997.
During the first six months of 1998, $9.2 million of cash was used in investing
activities, compared with $11.0 million used during the same period in 1997.
Capital expenditures for the first six months of 1998 were $8.5 million,
compared with $8.7 million for the same period in 1997. During the first six
months of 1998, $3.0 million of cash was provided by financing activities.
During the first six months of 1997, $37.9 million of cash was used, primarily
to prepay $40.7 million of unsecured notes and Industrial Revenue bonds.
The Company has available unsecured revolving and committed lines of credit as
sources of financing for its seasonal and other working capital requirements.
The Company's debt-to-capital ratio was 30.6% at June 26, 1998, compared with
31.8% at December 31, 1997 and 46.8% at June 27, 1997.
Management believes that the Company's capital needs for 1998 will be met
through its existing credit facilities and cash flows from operations without
the need for additional permanent financing. However, as discussed in an exhibit
to the Company's Form 10-K for the year ended December 31, 1997, entitled
"Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995", several risks and uncertainties could
cause the Company to need to raise additional capital through equity and/or debt
financing. The availability and terms of any such financing would be subject to
prevailing market conditions and other factors at that time.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information". In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and other Postretirement Benefits". SFAS
No. 130 has been adopted as of January 1, 1998. SFAS No. 131 and No. 132 may
require additional disclosures in the filing for the year ending December 31,
1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for the
Company's fiscal year beginning January 1, 2000. The Company has not determined
the effect on the consolidated financial statements of adopting SFAS No. 133.
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Form 10-Q
Page 10
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on May 21, 1998.
(b) At such Annual Meeting, proxies were solicited pursuant to
Regulation 14A of the Securities Exchange Act of 1934 and all
nominees for director were elected as indicated by the following
schedule of votes cast for each director. The holders of Class A
Common Stock elected the following directors:
Total Votes for Each Total Votes Withheld
Nominee Director from Each Director
------- -------- -----------------
John F. Brennan 8,632,294 6,633
Abraham Zaleznik 8,592,806 46,121
The holders of Class A Common Stock and the holders of Class B
Common Stock, voting together as a single class, elected the
following directors:
Total Votes for Each Total Votes Withheld
Nominee Director from Each Director
------- -------- ------------------
Robert M. Agate 31,974,626 45,921
Ian W. Diery 32,013,739 6,808
John A. Fitzsimmons 32,013,739 6,808
Jeffrey B. Swartz 32,013,764 6,783
Sidney W. Swartz 32,013,989 6,558
There were no abstentions or broker non-votes with respect to the
election of the director nominees.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
10.12 $100,000,000 Credit Agreement dated as of
April 30, 1998 among The Timberland Company,
certain banks listed therein and Morgan Guaranty
Trust Company of New York, as Agent.
27 Financial Data Schedule
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the period covered by this report.
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Form 10-Q
Page 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Timberland Company
-------------------------------------
(Registrant)
Date: August 7, 1998 /s/Geoffrey J. Hibner
-------------- -------------------------------------
Geoffrey J. Hibner
Senior Vice President -
Finance and Administration
and Chief Financial Officer
Date: August 7, 1998 /s/Dennis W. Hagele
-------------- -------------------------------------
Dennis W. Hagele
Vice President-Finance
and Corporate Controller
(Chief Accounting Officer)