**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                        | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                           |
|-----------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |       |                                                                                                                                                                                                                                                                                              |
|                              |       | **For  the quarterly period ended April 1, 2005**                                                                                                                                                                                                                                            |
|                              |       |                                                                                                                                                                                                                                                                                              |
| **OR**                            |
|                              |       |                                                                                                                                                                                                                                                                                              |
| **o**                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                          |
|                              |       |                                                                                                                                                                                                                                                                                              |
|                              |       | **For  the transition period from                     to                     ** |
|                              |       |                                                                                                                                                                                                                                                                                              |
| **Commission File Number 1-9548** |

 

**The Timberland Company**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Delaware**                                                                      |   | **02-0312554**                       |
|-----------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)                   |   | (I.R.S. Employer Identification No.) |
|                                                                              |   |                                 |
| **200 Domain Drive, Stratham, New Hampshire**                                     |   | **03885**                            |
| (Address of Principal Executive Offices)                                          |   | (Zip Code)                           |
|                                                                              |   |                                 |
| Registrant’s Telephone Number, Including Area Code:  **(603) 772-9500** |

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes  ý     No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

Yes  ý     No  o

 

OnApril 29, 2005, on a pre-split basis, 27,696,683 shares of the registrant’sClass A Common Stock were outstanding and 5,871,830 shares of theregistrant’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)**                                                       |                                                                                                                                |
|                                                                                                     |                                                                                                                                |
| **Item 1. Financial  Statements**                                                                        |                                                                                                                                |
|                                                                                                     | Unaudited  Condensed Consolidated Balance Sheets -  April 1, 2005, April 2, 2004 and  December 31, 2004              | 3 |
|                                                                                                     |                                                                                                                                |   |
|                                                                                                     | Unaudited  Condensed Consolidated Statements of Income -  For the three months ended April 1, 2005  and April 2, 2004     | 4 |
|                                                                                                     |                                                                                                                                |   |
|                                                                                                     | Unaudited  Condensed Consolidated Statements of Cash Flows -  For the three months ended April 1, 2005  and April 2, 2004 | 5 |
|                                                                                                     |                                                                                                                                |   |
|                                                                                                     | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                     | 6-11 |
|                                                                                                     |                                                                                                                                |
| **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations** | 12-19                                                                                                                               |
|                                                                                                     |                                                                                                                                |
| **Item  3. Quantitative and Qualitative Disclosures About Market Risk**                                  | 20                                                                                                                                  |
|                                                                                                     |                                                                                                                                |
| **Item 4. Controls and  Procedures**                                                                     | 20                                                                                                                                  |
|                                                                                                     |                                                                                                                                |
| **Part II Other Information**                                                                       |                                                                                                                                |
|                                                                                                     |                                                                                                                                |
| **Item  2. Unregistered Sales of Equity Securities and Uses of Proceeds**                                | 21                                                                                                                                  |
|                                                                                                     |                                                                                                                                |
| **Item 6.  Exhibits**                                                                                    | 22                                                                                                                                  |
|                                                                                                     |                                                                                                                                |
| Signatures                                                                                               | 23                                                                                                                                  |
|                                                                                                     |                                                                                                                                |
| Exhibit Index                                                                                       | 24                                                                                                                                  |
|                                                                                                     |                                                                                                                                |
| Exhibits                                                                                                 | 25-28                                                                                                                               |

 

2

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**PART I  FINANCIAL INFORMATION**

##### **Item 1. FINANCIAL STATEMENTS**

 

##### **THE TIMBERLAND COMPANY**

###### **UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

(Dollars in Thousands)

 
| ** **                                                                                                                                                                                                                                                                                                                                                            | ** ** | **April 1,  2005** | ** ** | **April 2,  2004** | ** ** | **Dec. 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                                                                                                                                                                                                                                            |       |                    |       |                    |       |                    |       |
| Current assets                                                                                                                                                                                                                                                                                                                                                        |       |                    |       |                    |       |                    |       |
| Cash and equivalents                                                                                                                                                                                                                                                                                                                                                  |       | $                       | 203,715    |                    | $          | 160,624                 |       | $ | 309,116 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $8,888 at April 1, 2005, $7,646 at April 2,  2004 and $8,927 at December 31, 2004                                                                                                                                                                                                      |       | 187,523                 |       | 161,195                 |       | 155,024                 |       |
| Inventory                                                                                                                                                                                                                                                                                                                                                             |       | 161,027                 |       | 142,828                 |       | 128,311                 |       |
| Prepaid expense                                                                                                                                                                                                                                                                                                                                                       |       | 28,410                  |       | 25,295                  |       | 27,659                  |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                 |       | 15,990                  |       | 20,136                  |       | 28,937                  |       |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                 |       | 596,665                 |       | 510,078                 |       | 649,047                 |       |
| Property, plant and equipment, net                                                                                                                                                                                                                                                                                                                                    |       | 78,232                  |       | 74,031                  |       | 78,979                  |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                              |       | 14,163                  |       | 14,163                  |       | 14,163                  |       |
| Intangible assets                                                                                                                                                                                                                                                                                                                                                     |       | 5,095                   |       | 3,735                   |       | 5,381                   |       |
| Other assets, net                                                                                                                                                                                                                                                                                                                                                     |       | 10,493                  |       | 9,164                   |       | 9,940                   |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                          |       | $                       | 704,648    |                    | $          | 611,171                 |       | $ | 757,510 |   |
|                                                                                                                                                                                                                                                                                                                                                                  |       |                    |       |                    |       |                    |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                         |       |                    |       |                    |       |                    |       |
| Current liabilities                                                                                                                                                                                                                                                                                                                                                   |       |                    |       |                    |       |                    |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                      |       | $                       | 53,009     |                    | $          | 31,510                  |       | $ | 52,370 |   |
| Accrued expense                                                                                                                                                                                                                                                                                                                                                       |       |                    |       |                    |       |                    |       |
| Payroll and related                                                                                                                                                                                                                                                                                                                                                   |       | 26,831                  |       | 28,987                  |       | 55,459                  |       |
| Other                                                                                                                                                                                                                                                                                                                                                                 |       | 61,764                  |       | 54,202                  |       | 68,579                  |       |
| Income taxes payable                                                                                                                                                                                                                                                                                                                                                  |       | 14,359                  |       | 13,808                  |       | 34,737                  |       |
| Derivative liabilities                                                                                                                                                                                                                                                                                                                                                |       | 4,380                   |       | 8,740                   |       | 15,047                  |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                             |       | 160,343                 |       | 137,247                 |       | 226,192                 |       |
| Deferred compensation and other liabilities                                                                                                                                                                                                                                                                                                                           |       | 13,935                  |       | 11,297                  |       | 12,543                  |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                 |       | 6,537                   |       | 8,955                   |       | 7,268                   |       |
| 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; 71,156,442 shares issued  at April 1, 2005, 88,755,170 shares issued at April 2, 2004 and  90,718,018 shares issued at December 31, 2004                                                                                                                 |       | 712                     |       | 444                     |       | 454                     |       |
| 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 April 1, 2005, 11,815,264 shares issued and outstanding at  April 2, 2004 and 11,743,660 shares issued and outstanding at  December 31, 2004 |       | 117                     |       | 59                      |       | 59                      |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                            |       | 208,242                 |       | 183,960                 |       | 238,829                 |       |
| Deferred compensation                                                                                                                                                                                                                                                                                                                                                 |       | (34,107                 | )          | (8,447                  | )          | (22,584                 | )          |
| Retained earnings                                                                                                                                                                                                                                                                                                                                                     |       | 616,623                 |       | 754,849                 |       | 876,398                 |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                                                                                                                                |       | 10,722                  |       | 4,478                   |       | 10,228                  |       |
| Treasury Stock at cost; 15,336,086  Class A shares at April 1, 2005, 30,423,108 Class A shares at  April 2, 2004 and 34,098,914 Class A shares at December 31,  2004                                                                                                                                                                    |       | (278,476                | )          | (481,671                | )          | (591,877                | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                       |       | 523,833                 |       | 453,672                 |       | 511,507                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                                                       |       | $                       | 704,648    |                    | $          | 611,171                 |       | $ | 757,510 |   |

 

*Shares have been restated to reflect the 2-for-1 stock split in May 2005.*

*The accompanying notes are an integral part of these unaudited condensedconsolidated financial statements.*

 

3

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**THE TIMBERLAND COMPANY**

**UNAUDITED CONDENSED****CONSOLIDATED STATEMENTS OF INCOME**

*(Amounts in Thousands, Except Per Share Data)*

 
| ** **                               | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **April 1,  2005**        | ** ** | **April 2,  2004** | ** ** |
| Revenue                                  |       | $                              | 354,211    |   | $ | 321,777 |   |
| Cost of goods sold                       |       | 167,050                        |       | 155,326 |   |
| Gross profit                             |       | 187,161                        |       | 166,451 |   |
|                                     |       |                           |       |   |   |
| Operating expense                        |       |                           |       |   |   |
| Selling                                  |       | 100,739                        |       | 95,352 |   |
| General and administrative               |       | 24,502                         |       | 23,341 |   |
| Total operating expense                  |       | 125,241                        |       | 118,693 |   |
| Operating income                         |       | 61,920                         |       | 47,758 |   |
|                                     |       |                           |       |   |   |
| Other income                             |       |                           |       |   |   |
| Interest income, net                     |       | 1,101                          |       | 234 |   |
| Other, net                               |       | 990                            |       | 293 |   |
| Total other income                       |       | 2,091                          |       | 527 |   |
|                                     |       |                           |       |   |   |
| Income before provision for income taxes |       | 64,011                         |       | 48,285 |   |
|                                     |       |                           |       |   |   |
| Provision for income taxes               |       | 21,764                         |       | 17,141 |   |
|                                     |       |                           |       |   |   |
| Net income                               |       | $                              | 42,247     |   | $ | 31,144 |   |
|                                     |       |                           |       |   |   |
| Earnings per share                       |       |                           |       |   |   |
| Basic                                    |       | $                              | .63        |   | $ | .45 |   |
| Diluted                                  |       | $                              | .61        |   | $ | .43 |   |
| Weighted-average shares outstanding      |       |                           |       |   |   |
| Basic                                    |       | 67,587                         |       | 69,792 |   |
| Diluted                                  |       | 69,026                         |       | 71,613 |   |

 

*Earnings per share and weighted-average shares have been restated toreflect the 2-for-1 stock split in May 2005.*

*The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.*

 

4

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**THE TIMBERLAND COMPANY**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Dollars in Thousands)

 
| ** **                                                                     | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **April 1, 2005**         | ** ** | **April 2, 2004** | ** ** |
|                                                                           |       |                           |       |   |   |
| Cash flows from operating activities:                                          |       |                           |       |   |   |
|                                                                           |       |                           |       |   |   |
| Net income                                                                     |       | $                              | 42,247     |   | $ | 31,144 |   |
| Adjustments to reconcile net income to net  cash used by operating activities: |       |                           |       |   |   |
| Deferred income taxes                                                          |       | 6,567                          |       | 6,203 |   |
| Amortization of deferred compensation                                          |       | 662                            |       | 629 |   |
| Depreciation and other amortization                                            |       | 5,962                          |       | 6,012 |   |
| Loss on disposal of property, plant and  equipment                             |       | 64                             |       | 106 |   |
| Tax benefit from stock option plans                                            |       | 2,845                          |       | 3,830 |   |
| Increase/(decrease) in cash from changes in  working capital:                  |       |                           |       |   |   |
| Accounts receivable                                                            |       | (36,116                        | )          | (38,279 | ) |
| Inventory                                                                      |       | (33,474                        | )          | (23,192 | ) |
| Prepaid expense                                                                |       | (1,333                         | )          | 596 |   |
| Accounts payable                                                               |       | 3,462                          |       | (5,131 | ) |
| Accrued expense                                                                |       | (35,400                        | )          | (32,205 | ) |
| Income taxes                                                                   |       | (20,309                        | )          | (13,707 | ) |
| Net cash used by operating activities                                          |       | (64,823                        | )          | (63,994 | ) |
|                                                                           |       |                           |       |   |   |
| Cash flows from investing activities:                                          |       |                           |       |   |   |
|                                                                           |       |                           |       |   |   |
| Additions to property, plant and equipment                                     |       | (4,334                         | )          | (3,392 | ) |
| Other, net                                                                     |       | (102                           | )          | (196 | ) |
| Net cash used by investing activities                                          |       | (4,436                         | )          | (3,588 | ) |
|                                                                           |       |                           |       |   |   |
| Cash flows from financing activities:                                          |       |                           |       |   |   |
|                                                                           |       |                           |       |   |   |
| Common stock repurchases                                                       |       | (41,868                        | )          | (20,145 | ) |
| Issuance of common stock                                                       |       | 7,947                          |       | 6,581 |   |
| Net cash used by financing activities                                          |       | (33,921                        | )          | (13,564 | ) |
| Effect of exchange rate changes on cash and  equivalents                       |       | (2,221                         | )          | (33 | ) |
| Net decrease in cash and equivalents                                           |       | (105,401                       | )          | (81,179 | ) |
| Cash and equivalents at beginning of period                                    |       | 309,116                        |       | 241,803 |   |
| Cash and equivalents at end of period                                          |       | $                              | 203,715    |   | $ | 160,624 |   |
|                                                                           |       |                           |       |   |   |
| Supplemental disclosures of cash flow  information:                            |       |                           |       |   |   |
| Interest paid                                                                  |       | $                              | 164        |   | $ | 140 |   |
| Income taxes paid                                                              |       | $                              | 32,730     |   | $ | 20,782 |   |

 

*The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.*

 

5

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**THE TIMBERLAND COMPANY**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

*(Amounts in Thousands, Except Share and Per Share Data)*

 

**Note1.  Summary of Significant AccountingPolicies**

 

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements contain the adjustments necessary to present fairly TheTimberland Company’s (“we”, “our”, “us”, “Timberland” or the “Company”)financial position, results of operations and changes in cash flows for theinterim periods presented. Such adjustments consist of normal recurring items.The unaudited condensed consolidated financial statements should be read inconjunction with our consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-K, as amended by Amendments No. 1and No. 2 on Form 10-K/A for the year ended December 31, 2004.

 

Ourrevenue consists of sales to wholesale customers, retail store revenues,license fees and royalties. We record wholesale revenues when title passes andthe risks and rewards of ownership have passed to the customer, based on theterms of sale. Title passes generally upon shipment or upon receipt by thecustomer, depending on the country of sale and the agreement with the customer.Retail store revenues are recorded at the time of the sale. License fees androyalties are recognized as earned per the terms of our licensing agreements.

 

Inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 00-10, “Accountingfor Shipping and Handling Fees and Costs,” in the first quarters of 2005 and2004 we recorded $1,195 and $1,208 of reimbursed shipping expenses withinrevenues and the related shipping costs within selling expense, respectively.Shipping costs included in selling expense were $4,482 and $4,382 for the firstquarters of 2005 and 2004, respectively.

 

**Note2.   Historical Financial Results**

 

Theresults of operations for the three months ended April 1, 2005 are notnecessarily indicative of the results to be expected for the full year.Historically, our revenue has been more heavily weighted to the second half ofthe year.

 

**Note3.  Stock Split**

 

OnMarch 3, 2005, the Company announced that its Board of Directors approveda 2-for-1 split of its Class A and Class B Common Stock. Theadditional shares were distributed on May 2, 2005, to shareholders ofrecord on April 14, 2005. In addition, the Board of Directors approved theretirement of 10.0 million Class A Treasury shares, on a pre-split basis.Additionally, the Board also approved a 100% increase in shares remaining underits previously announced repurchase program as of the April 14, 2005record date to reflect the impact of the stock split. The increase waseffective immediately after the May 2, 2005 distribution date. The sharespresented in the condensed consolidated balance sheets as of April 1, 2005,April 2, 2004 and December 31, 2004, the number of shares used in thecomputation of earnings per share in the condensed consolidated statements ofincome for the three months ended April 1, 2005 and April 2, 2004 andthe shares and earnings per share in the notes to the unaudited condensedconsolidated financial statements were based on the number of sharesoutstanding after giving effect to the stock split, except as otherwise noted.

 

**Note4.  Stock-based Compensation**

 

Weapply Accounting Principle Board (“APB”) Opinion No. 25 and relatedinterpretations in accounting for our stock plans, Statement of FinancialAccounting Standards (“SFAS”) No. 123 “Accounting for Stock-BasedCompensation” and SFAS No. 148 “Accounting for Stock-Based Compensation-Transitionaland Disclosure-An Amendment of FASB Statement No. 123” for disclosurepurposes.

 

6

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Inour unaudited condensed consolidated statements of income, no compensation costhas been recognized for stock option grants issued under any of our stockoption plans; however, the Company has recognized compensation cost forrestricted stock awards. Had compensation cost for stock option grants issuedbeen determined under the fair value method of SFAS No. 123, our netincome and diluted earnings per share for the three months ended April 1,2005 and April 2, 2004 would have been:

 
| ** **                                                                                                                                   | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **April 1, 2005**         | ** ** | **April 2, 2004** | ** ** |
| Net income as reported                                                                                                                       |       | $                              | 42,247     |   | $ | 31,144 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effect                                   |       | 437                            |       | 406 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effect |       | 2,447                          |       | 2,578 |   |
| Pro forma net income                                                                                                                         |       | $                              | 40,237     |   | $ | 28,972 |   |
| Basic earnings per share, as reported                                                                                                        |       | $                              | .63        |   | $ | .45 |   |
| Pro forma basic earnings per share                                                                                                           |       | $                              | .60        |   | $ | .42 |   |
| Diluted earnings per share, as reported                                                                                                      |       | $                              | .61        |   | $ | .43 |   |
| Pro forma diluted earnings per share                                                                                                         |       | $                              | .58        |   | $ | .40 |   |

 

Thefair value of each stock option granted for the three months ended April 1,2005 and April 2, 2004 under our plans was estimated on the date of grantusing the Black-Scholes option pricing model. The following weighted-average assumptionswere used to value grants issued under our plans for the three months ended April 1,2005 and April 2, 2004, respectively:

 

| ** **              | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **April 1,  2005**        | ** ** | **April 2, 2004** | ** ** |
| Expected volatility     |       | 29.7                           | %          | 36.5 | % |
| Risk-free interest rate |       | 3.5                            | %          | 1.7 | % |
| Expected lives (years)  |       | 4.6                            |       | 4.5 |   |
| Dividend payments       |       | —                         |       | — |   |

 

Theweighted-average fair value per share of stock options granted, for whichexercise price equals market value at the date of grant, for the three monthsending April 1, 2005 and April 2, 2004 were $10.82 and $10.19,respectively.

 

**Note 5.** **Earnings Per Share**

 

Basicearnings per share (“EPS”) excludes common stock equivalents and is computed bydividing net income by the weighted-average number of common shares outstandingfor the periods presented. Diluted EPS reflects the potential dilution thatwould occur if potentially dilutive securities such as stock options wereexercised. Dilutive securities included in the calculation of dilutedweighted-average shares were 1,438,496 and 1,820,740 for the three months endedApril 1, 2005 and April 2, 2004, respectively. Anti-dilutivesecurities excluded from the calculation of diluted weighted-average shareswere 255,708 and 1,152,886 for the first quarters of 2005 and 2004, respectively.

 

7

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**Note6.  Goodwill and Other Intangible Assets**

 

Weperform our annual impairment tests at the end of our second fiscal quarter anddetermined that no impairment of reported goodwill had occurred in 2004.

 

Informationregarding our other intangible assets, which consists of trademarks andpatents, follows:

 
| **April 1, 2005** | ** ** | **April 2, 2004**        | ** ** | **December 31, 2004** | ** ** |
|------------------------|------------|-------------------------------|------------|----------------------------|------------|
| **Carrying  Amount**   | ** ** | **Accumulated  Amortization** | ** ** | **Net**                    | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| $                      | 9,461      |                          | $          | (4,366                     | )          | $ | 5,095 |   | $ | 7,610 |   | $ | (3,875 | ) | $ | 3,735 |   | $ | 10,579 |   | $ | (5,198 | ) | $ | 5,381 |   |
|                        |            |                               |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense ofintangible assets with definite lives for the first quarters of 2005 and 2004was $466 and $339, respectively. The estimated amortization for existingintangible assets as of April 1, 2005, for each of the five succeedingfiscal years is as follows: 2005: $1,748; 2006: $1,466; 2007: $1,136; 2008:$831; 2009: $377. The amortization period for other intangible assets andrelated expenses is five years.

 

**Note 7.** **Derivatives**

 

Allderivatives entered into by the Company are designated as either cash flow orfair value hedges. Cash flow hedges are derivative contracts hedging forecastedtransactions. Fair value hedges are derivatives hedging existing foreigncurrency assets or liabilities. The change in value of cash flow hedges isrecorded in other comprehensive income until the hedged transaction affectsearnings, at which point the other comprehensive income is reclassified toearnings. The change in value of fair value hedges is recorded in earnings andis largely offset by the change in the fair value of the underlying asset orliability. We are required to measure the effectiveness of our cash flowhedges. If it is determined that a cash flow hedge is not effective, theineffective portion of a derivative’s change in fair value will be immediatelyrecognized in earnings.

 

Inthe normal course of business, the financial position and results of operationsof the Company are routinely subject to currency rate movements in non-U.S.Dollar denominated assets, liabilities and income as we purchase and sell goodsin local currencies. We have established policies and business practices thatshould result in an appropriate level of protection against the adverse effectof these exposures. We use derivative instruments, specifically forwardcontracts, to hedge a portion of our forecasted foreign currency transactions,typically for a period not greater than 18 months. Those derivative instrumentsare viewed as risk management tools and are not used for trading or speculativepurposes. As of April 1, 2005, we had forward contracts maturing atvarious dates through January 2006 to sell the equivalent of $177,543 inforeign currencies at contracted rates and to buy the equivalent of $17,646 inforeign currencies at contracted rates. As of April 2, 2004, we hadforward contracts maturing at various dates through April 2005 to sell theequivalent of $178,241 in foreign currencies at contracted rates and to buy theequivalent of $3,639 in foreign currencies at contracted rates.

 

OnApril 1, 2005, April 2, 2004 and December 31, 2004, we had$4,380, $8,740 and $15,047 in derivative liabilities, respectively. Those amountsreflect the fair value of our cash flow hedges. The $4,380 derivative liabilityas of April 1, 2005 represents hedges in place through the fourth quarterof 2005.

 

8

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**Note 8.  Comprehensive Income**

 

Comprehensiveincome for the three months ended April 1, 2005 and April 2, 2004follows:

 
| ** **                                                              | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **April 1, 2005**         | ** ** | **April 2, 2004** | ** ** |
| Net income                                                              |       | $                              | 42,247     |   | $ | 31,144 |   |
| Change in cumulative translation adjustment                             |       | (4,523                         | )          | (1,292 | ) |
| Change in fair value of derivative  financial instruments, net of taxes |       | 5,018                          |       | 4,464 |   |
| Comprehensive income                                                    |       | $                              | 42,742     |   | $ | 34,316 |   |

 

For the three monthsended April 1, 2005 and April 2, 2004, the after tax hedging lossesreclassified to earnings were $1,427 and $2,386, respectively. The decrease in2005 hedging losses compared to 2004 resulted from actual rates being closer tohedge contract rates.

 

**Note 9.  Business Segments andGeographic Information**

 

Wemanage our business in three reportable segments, each sharing similar product,distribution and marketing. The reportable segments are U.S. Wholesale, U.S.Consumer Direct and International. The U.S. Wholesale segment is comprised ofthe sale of products to wholesale customers in the United States. This segmentalso includes royalties from licensed products sold in the United States andthe management costs and expenses associated with our worldwide licensingefforts. This segment now includes some marketing expenses and value addedservices previously in Unallocated Corporate. The U.S. Consumer Direct segmentincludes the Company-operated specialty and factory outlet stores in the UnitedStates and our e-commerce business. The International segment consists of themarketing, selling and distribution of footwear, apparel and accessories andlicensed products outside of the United States. Products are sold outside ofthe United States through our subsidiaries (which use wholesale and retailchannels to sell footwear, apparel and accessories), independent distributorsand licensees.

 

TheUnallocated Corporate component of segment reporting consists primarily ofcorporate finance, information services, legal and administrative expenses,United States distribution expenses, a majority of United States marketingexpenses, worldwide product development and other costs incurred in support ofcompany-wide activities. Unallocated Corporate also includes total otherincome, which is primarily interest income, net, and other miscellaneousincome, net. Such income/(expense) is not allocated among the reported businesssegments.

 

Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies. We evaluate segment performancebased on operating contribution, which represents pre-tax income beforeunallocated corporate expenses, interest and other expenses, net, and onoperating cash flow measurements. Total assets are disaggregated to the extentthat assets apply specifically to a single segment. Unallocated Corporate assetsprimarily consist of cash and equivalents, manufacturing/sourcing assets,computers and related equipment, and United States transportation anddistribution equipment.

 

9

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**Forthe Three Months Ended April 1, 2005 and April 2, 2004**

 
| ** **                        | ** ** | **U.S.  Wholesale** | ** ** | **U.S.  Consumer  Direct** | ** ** | **International** | ** ** | **Unallocated  Corporate** | ** ** | **Consolidated** | ** ** |
|-----------------------------------|------------|---------------------|------------|----------------------------|------------|-------------------|------------|----------------------------|------------|------------------|------------|
| **2005**                          |       |                |       |                       |       |              |       |                       |       |             |       |
| Revenue                           |       | $                   | 116,818    |                       | $          | 38,319            |       | $                          | 199,074    |             | $          | — |   | $ | 354,211 |   |
| Operating income/(loss)           |       | 36,422              |       | 4,466                      |       | 55,200            |       | (34,168                    | )          | 61,920           |       |
| Income/(loss) before income taxes |       | 36,422              |       | 4,466                      |       | 55,200            |       | (32,077                    | )          | 64,011           |       |
| Total assets                      |       | 151,581             |       | 27,854                     |       | 306,273           |       | 218,940                    |       | 704,648          |       |
| Goodwill                          |       | 6,804               |       | 794                        |       | 6,565             |       | —                     |       | 14,163           |       |
|                              |       |                |       |                       |       |              |       |                       |       |             |       |
| **2004**                          | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **       | ** ** |
| Revenue                           |       | $                   | 111,348    |                       | $          | 37,777            |       | $                          | 172,652    |             | $          | — |   | $ | 321,777 |   |
| Operating income/(loss)           |       | 37,205              |       | 3,396                      |       | 40,140            |       | (32,983                    | )          | 47,758           |       |
| Income/(loss) before income taxes |       | 37,205              |       | 3,396                      |       | 40,140            |       | (32,456                    | )          | 48,285           |       |
| Total assets                      |       | 127,416             |       | 26,567                     |       | 247,387           |       | 209,801                    |       | 611,171          |       |
| Goodwill                          |       | 6,804               |       | 794                        |       | 6,565             |       | —                     |       | 14,163           |       |

 

**Note10.  Inventory**

 

Inventoryconsists of the following:

 

| ** **      | ** ** | **April 1,  2005** | ** ** | **April 2,  2004** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Materials       |       | $                       | 3,144      |                    | $          | 3,859                       |       | $ | 3,752 |   |
| Work-in-process |       | 1,411                   |       | 1,612                   |       | 1,364                       |       |
| Finished goods  |       | 156,472                 |       | 137,357                 |       | 123,195                     |       |
| Total           |       | $                       | 161,027    |                    | $          | 142,828                     |       | $ | 128,311 |   |

 

10

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**Note11.  Restricted Stock Awards and Other**

 

In2004, our Board of Directors approved future awards of restricted share grantsof Class A Common Stock under the Company’s 1997 Incentive Plan, asamended, and a cash incentive award. The award of these restricted share grantsand the cash incentive award is based on achieving certain performance targetsfor the period January 1, 2004 through December 31, 2006. Based onthe achievement of 2004 performance targets, $10,873 of restricted shares willbe awarded on July 5, 2005. The number of shares to be awarded will bedetermined by the share price at that date. These shares will vest equally overthree years from the award date. An additional grant of 200,000 restrictedshares with a fair market value of $7,028, based on the achievement of aseparate performance target, will also be awarded on July 5, 2005. Theseshares will vest two years after the award date. These shares will be subjectto restrictions on sale and transferability, a risk of forfeiture and certainother terms and conditions. Accordingly, as of April 1, 2005, we recordeddeferred compensation on our balance sheet to reflect these future awards. Forthe period January 1, 2005 through December 31, 2006, grants of$9,185 and $9,509 will be made in 2006 and 2007, respectively, if certaintargeted performance goals are achieved. The award amount will vary based uponthe degree to which these performance goals are attained. The number of sharesto be awarded will be determined by the share price at that date. Additionally,the cash incentive award of up to $3,000 is based on achievement of aperformance target over a three year measurement period from January 1,2004 to December 31, 2006, and may be awarded in 2007.

 

InMarch 2005, our Board of Directors approved a cash incentive award. This cashincentive award of up to $1,250 is based on achievement of a performance targetover a one year measurement period from January 1, 2005 toDecember 31, 2005 and may be awarded in 2007.

 

**Note12.  Income Taxes**

 

Theeffective tax rate for the three months ended April 1, 2005 was 34.0%. Theeffective tax rate for the three months ended April 2, 2004 was 35.5%. Weestablished a Hong Kong procurement companyand international treasury center in Switzerland in the fourth quarter of 2004,which better aligns our organizational structure with our expanding globalpresence and reduces our estimated taxes on foreign earnings.

 

**Note13.  Share Repurchase**

 

OnSeptember 23, 2003, our Board of Directors approved an additionalrepurchase of up to 4,000,000 shares of our Class A Common Stock. As of April 1,2005, we have repurchased 2,202,448 shares under this authorization prior tothe previously discussed stock split in note 3. We may use repurchased sharesto offset future issuances under the Company’s stock-based employee incentiveplans or for other purposes. From time to time, we use Rule 10b5-1 plansto facilitate share repurchases. Shares repurchased totaled 618,586 during thequarter ended April 1, 2005. The Board approved a 100% increase in sharesremaining under its previously announced repurchase program as of the April 14,2005 record date to reflect the impact of the stock split. The increase waseffective immediately after the May 2, 2005 distribution date. Aftergiving effect to the stock split, there were 3,234,440 shares remaining in therepurchase program.

 

**Note 14.  Litigation**

 

Weare involved in various litigation and legal matters that have arisen in theordinary course of business. Management believes that the ultimate resolutionof any existing matter will not have a material adverse effect on ourconsolidated financial statements.

 

11

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**Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Thefollowing discusses The Timberland Company’s (“we”, “our”, “us”, “Timberland”or the “Company”) results of operations and liquidity and capital resources.The discussion, including known trends and uncertainties identified bymanagement, should be read in conjunction with the unaudited condensedconsolidated financial statements and related notes. Included is a discussionand reconciliation of total Company and International revenue growth toconstant dollar revenue growth. Constant dollar revenue growth, which excludesthe impact of changes in foreign exchange rates, is not a Generally AcceptedAccounting Principle (“GAAP”) performance measure. We provide constant dollarrevenue growth for total Company and International results because we use themeasure to understand revenue growth excluding any impact from foreign exchangerate changes.

 

#### **CriticalAccounting Policies**

#### ** **

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our unaudited condensed consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, expenses and related disclosure of contingentassets and liabilities. On an on-going basis, we evaluate our estimates,including those related to sales returns and allowances, realization ofoutstanding accounts receivable, the carrying value of inventories,derivatives, other contingencies, impairment of assets, incentive compensationaccruals and the provision for income taxes. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Historically, actual results have not beenmaterially different from our estimates. Because of the uncertainty inherent inthese matters, actual results could differ from the estimates used in applyingour critical accounting policies. Currently, the Company is not aware of anyreasonably likely events or circumstances that would result in materiallydifferent amounts being reported. Our significant accounting policies aredescribed in Note 1 to the Company’s consolidated financial statements of ourAnnual Report on Form 10-K for the year ended December 31, 2004. Ourestimates, assumptions and judgments involved in applying the critical accountingpolicies are described in the Management’s Discussion and Analysis of FinancialCondition and Results of Operations section of our Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

#### **Overview**

#### ** **

Ourprincipal strategic goal is to become the authentic outdoor brand of choiceglobally. We continue to develop a diverse portfolio of footwear, apparel andaccessories that reinforces the functional performance, benefits and classicstyling that consumers have come to expect from our brand. We sell our productsto consumers who embrace an outdoor-inspired lifestyle through high-qualitydistribution channels, including our own retail stores, which reinforce thepremium positioning of the Timberlandâ brand.

 

Todeliver against our long-term goals, we are focused on driving progress on keystrategic fronts. These include enhancing our leadership position in our corefootwear business, capturing the opportunity that we see for outdoor-inspiredapparel, extending brand reach through development of the Timberland PROâ series and brand building licensingarrangements, expanding geographically, driving operational and financialexcellence while setting the standard for commitment to the community andstriving to be a global employer of choice.

 

Highlightsof our first quarter of 2005 financial performance, compared to the firstquarter of 2004, include the following:

 

•                  Revenues increased 10.1% to $354.2 million,driven by 4.0% growth in our U.S. business and 15.3% growth in ourInternational operations.

 

•                  Operating profits increased 29.7% to $61.9million.

 

•                  Operating margins expanded 260 basis pointsto 17.5%, reflecting improvement in gross margin and operating expenseleverage.

 

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•                  Net income increased 35.7% to $42.2 million.

 

•                  Diluted earnings per share increased by 41.9%from $0.43 to $0.61, reflecting strong profit gains and the benefit of sharesrepurchased in the last year.

 

•                  Cash at the end of the quarter was $203.7million with no debt outstanding.

 

**Resultsof Operations****for the three months ended April 1, 2005 and April 2, 2004**

 

# Revenue

 

Consolidatedrevenue growth of 10.1% in the first quarter of 2005 reflected double-digitconstant dollar gains in our International business and moderate gains in ourU.S. business. Revenue growth reflected strong growth in Europe and better thanexpected growth in the U.S., due in part to favorable weather conditions. U.S.business revenue totaled $155.1 million in the first quarter of 2005, up 4.0%over the prior-year period. International revenues were $199.1 million, 15.3%ahead of the first quarter of 2004, or 11.0% in constant dollars. Revenueresults benefited globally from earlier phasing of customers orders, in partimpacted by earlier Easter timing this year. Overall, changes in currencyexchange rates were responsible for 2.3% of consolidated revenue growth.

 

SegmentsReview 

 

Wehave three reportable business segments (see Note 9): U.S. Wholesale, U.S.Consumer Direct and International.

 

Revenuesfor our U.S. Wholesale business increased 4.9% to $116.8 million, driven bygrowth in key footwear categories such as Timberland PROâ footwear, men’s casual, kids’and boots and double-digit gains in apparel and accessories. These gains wereoffset by declines in women’s casual footwear, impacted by comparisons to avery strong prior year sell-in of select programs such as the Metroslim line.Overall U.S. Wholesale business growth was supported by higher levels ofoff-price sales related to inventory control efforts in a relatively soft U.S.market.

 

U.S.Consumer Direct posted solid performance in the first quarter with comparablestore sales gains of 3.9%, supported by solid footwear growth, which benefitedfrom winter weather conditions. Our e-commerce business also posted strongrevenue gains. Sales gains were driven by growth in boots and kids’, offset bymodest declines in apparel, accessories and women’s casual footwear. U.S.Consumer Direct revenues for the first quarter expanded $0.5 million, or 1.4%,to $38.3 million, with overall growth impacted by a decrease in U.S. storecount over the past year.

 

Internationalrevenues for the first quarter of 2005 increased 15.3% to $199.1 million,benefiting from strong growth in our boots, kids’ and outdoor performancefootwear categories, benefits from foreign exchange rate changes and improvedperformance in apparel sales. Overall, International revenues increased to56.2% of total consolidated revenues.

 

Europeanrevenues were $162.3 million, up 16.6% compared to the prior-year period, withan increase of 12.0% on a constant dollar basis. Revenues were driven by stronggrowth in key Northern European markets such as the UK, France, Benelux andScandinavia. European footwear sales gains were driven by double-digit constantdollar gains in boots and kids’. Apparel sales were also up moderately,reflecting benefits from our enhanced focus on Timberland’s core heritageconsumer.

 

InAsia, first quarter 2005 revenues grew 11.0%, or 8.5% in constant dollars, to$31.6 million, reflecting strong gains in key regions, including double-digitgains in important Southeast Asia markets such as Taiwan and Hong Kong andsolid growth in Japan. Growth was driven by key footwear categories such asoutdoor performance, boots and men’s casual and solid gains in apparel.

 

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Products

 

Worldwidefootwear revenue was $266.0 million in the first quarter of 2005, up $26.7million or 11.1% from the prior-year period. Excluding the benefit of foreignexchange, footwear revenues increased 8.9%. Growth was driven by global gainsin boots, kids’, men’s casual, and Timberland PROâ series footwear. Worldwide footwear unitsales were up 12.2%, while the average price decreased by 1.0%, reflecting theimpact of product and channel mix, offset by foreign exchange rate benefits.

 

Worldwideapparel and accessories revenue for the first quarter of 2005 grew by 6.7% to$84.6 million. Excluding the benefit of foreign exchange, apparel andaccessories revenue increased 4.5%. Apparel and accessories unit salesincreased 5.2% while average selling prices increased 1.4%, reflectingfavorable foreign currency impacts.

 

Channels

 

Revenuegrowth in the first quarter of 2005 reflected strong global gains in thewholesale channel and solid gains in the consumer direct channels. Globalwholesale revenues grew 11.6% to $275.6 million while global consumer directrevenues increased 5.1% to $78.6 million. Worldwide comparable store salesincreased 5.4%. Globally, we opened six retail locations and closed eleven inthe first quarter of 2005.

 

GrossProfit

 

Grossprofit as a percentage of sales, or gross margin, was 52.8% for the firstquarter of 2005, 110 basis points higher than first quarter 2004 gross margin.Foreign exchange rate trends and benefits from favorable hedge rate changesdrove the improvement.

 

Weinclude the costs of procuring inventory (sourcing costs, inbound freight andduty, overhead and other similar costs) in cost of goods sold. These costsamounted to $21.5 million and $20.1 million for the first quarters of 2005 and2004, respectively.

 

OperatingExpense

 

Operatingexpense for the first quarter of 2005 was $125.2 million, 5.5% higher than the$118.7 million reported in the 2004 first quarter. As a percent of revenue,operating expense decreased 150 basis points to 35.4%. The operating expenseincrease was driven by a $5.4 million increase in selling expenses and a $1.1million increase in general and administrative expenses. Foreign exchange ratechanges added $2.2 million, or 1.9%, to overall operating expense growth.

 

Sellingexpense for the first quarter of 2005 was $100.7 million, $5.4 million, or5.7%, higher than in the first quarter of 2004. The increase was driven byapproximately $1.8 million of incremental sales and marketing expenditures,$1.3 million of costs related to international retail expansion, $1.2 millionin distribution costs and $0.4 million in product development costs offset by adecrease of $1.3 million in incentive compensation programs. Foreign exchangerate changes added $1.9 million, or 2.0% to overall selling expense growth.

 

Weinclude the costs of physically managing inventory (warehousing and handlingcosts) in selling expense. These costs totaled $9.0 million and $8.4 million inthe first quarters of 2005 and 2004, respectively.

 

Advertisingexpense, which is also included in selling expense, was $7.3 million and $7.5million in the first quarters of 2005 and 2004, respectively. Advertising costsare expensed at the time the advertising is used, predominantly in the seasonthat the advertising costs are paid. Prepaid advertising recorded on ourconsolidated balance sheets on April 1, 2005 and April 2, 2004 was$0.4 million and $0.6 million, respectively.

 

Generaland administrative expense for the first quarter of 2005 was $24.5 million,$1.2 million, or 5.0%, higher than the prior-year period. As a percentage ofrevenue, general and administrative expense decreased by 30 basis points,compared with the prior-year period. The increase was driven by approximately$0.6 million in costs associated with our incentive compensation programs and$0.3 million in corporate support, principally for strategic initiatives.Foreign exchange rate changes also added $0.3 million, or 1.1%, to overallgeneral and administrative expense growth.

 

14

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OperatingIncome

 

Operatingincome for the first quarter of 2005 was $61.9 million, $14.2 million, or 29.7%higher than first quarter 2004. Operating income as a percentage of revenue expanded 260 basis points to17.5%.

 

Operatingincome for our U.S. Wholesale segment was $36.4 million, $0.8 million, or 2.1%lower than the prior-year period. Revenue growth of 4.9% was offset by a 320basis point decline in gross margin. The decrease in margin was drivenprimarily by higher levels of off-price sales related to inventory controlefforts in a relatively soft U.S. market climate.

 

OurU.S. Consumer Direct segment’s operating income for the 2005 first quarter increasedto $4.5 million, or 31.5% higher than prior period. The increase was driven by1.4% revenue growth and a 310 basis point decrease in operating expense as apercentage of sales reflecting leveraged variable store expenses and realestate portfolio management.

 

Operatingincome for our International segment grew by 37.5% to $55.2 million for thequarter. Revenue growth of 15.3% and a 390 basis point gross margin improvementdrove much of the increase. Both benefited from favorable foreign exchange ratechanges. The expansion in gross margin also reflected favorable product mixreflecting strong footwear sales and lower product costs resulting fromenhanced supply chain execution offset by relatively higher markdowns.Operating expense rates for our International segment decreased 60 basispoints.

 

OurUnallocated Corporate expenses, which include central support andadministrative costs, not allocated to our business segments, increased 3.6% to$34.2 million, below the rate of revenue growth. Unallocated Corporate expensesas a percentage of total revenue fell 60 basis points to 9.6% of total revenue.

 

# Other Income and Taxes

 

Interest income,net, which is comprised of interest income offset by fees related to theestablishment and maintenance of our revolving credit facility and interestpaid on short-term borrowings, was $1.1 million and $0.2 million for the firstquarters of 2005 and 2004, respectively. Higher interest rates and higher cashbalances supported the increase in net interest income. While we expectcontinued benefits from relatively higher interest rates this year, we expectthe year over year gains in interest income will narrow in future quartersreflecting the seasonality of our cash flow.

 

Other, netincluded $1.0 million of foreign exchange gains resulting from the timing ofsettlement of local currency denominated receivables and payables. These gainswere driven by the volatility of exchange rates within the quarter, and shouldnot be considered indicative of expected future results.

 

Theeffective income tax rate was 34.0% in the first quarter of 2005, compared to35.5% in the first quarter of 2004. We established a Hong Kong procurement company and international treasury center inSwitzerland in the fourth quarter of 2004, which better aligns ourorganizational structure with our expanding global presence and reducesour estimated taxes on foreign earnings.

 

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## **Reconciliation of Total and International RevenueIncreases To Constant Dollar Revenue Increases**

 

TotalCompany Revenue Reconciliation:

 
| ** **                                     | ** ** | **For the Three Months  Ended April 1, 2005** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **$ ****Millions  Change**                    | ** ** | **%****Change** | ** ** |
| Revenue increase (GAAP)                        |       | $                                                  | 32.4       |   | 10.1 |   |
|                                           |       |                                               |       |   |   |
| Increase due to foreign exchange rate  changes |       | 7.4                                                |       | 2.3 |   |
| Revenue increase in constant dollars           |       | 25.0                                               |       | 7.8 |   |
|                                                |            |                                                    |            |  |  |  |

 

InternationalRevenue Reconciliation:

 
| ** **                                     | ** ** | **For the Three Months  Ended April 1, 2005** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **$ Millions  Change**                        | ** ** | **%****Change** | ** ** |
| Revenue increase (GAAP)                        |       | $                                                  | 26.4       |   | 15.3 |   |
|                                           |       |                                               |       |   |   |
| Increase due to foreign exchange rate  changes |       | 7.4                                                |       | 4.3 |   |
| Revenue increase in constant dollars           |       | 19.0                                               |       | 11.0 |   |
|                                                |            |                                                    |            |  |  |  |

 

Management provides constant dollar revenue growth fortotal Company and International results because we use the measure tounderstand revenue growth excluding any impact from foreign exchange ratechanges.

 

AccountsReceivable and Inventory

 

Accountsreceivable increased 16.3% to $187.5 million at April 1, 2005, comparedwith $161.2 million reported at April 2, 2004. Days sales outstandingincreased three days to 48 days reflecting business mix impacts related tostronger International sales which carry longer sales terms and some erosion inthe timeliness of U.S. collections. Wholesale days outstanding increased fivedays from 49 to 54 days for the first quarters ended April 2, 2004 and April 1,2005, respectively.

 

Inventoryincreased 12.7% to $161.0 million at April 1, 2005 from $142.8 million at April 2,2004. On a comparable basis, inventory rose 4.5%, which was well below our rateof revenue growth. In the fourth quarter of2004, we established a Hong Kong procurement company and international treasurycenter in Switzerland to better align our organizational structure with ourexpanding global presence and provide enhanced support to our global sourcingoperations and International business. Related to the implementation of the neworganizational structure, we modified certain sourcing arrangements, whichresulted in earlier transfer of title for a portion of the Company’s thirdparty sourced product in 2005. Earlier transfer of title resulted inoffsetting higher quarter end inventory and accounts payable balances, as werecognized an inventory asset and related payable roughly two weeks earlierthan in the prior-year period. Had similar sourcing arrangements been in effectin the first quarter of 2004, we estimate that inventory and accounts payablebalances would have increased by approximately $11.2 million. Had the newsourcing arrangements been in place in the past, we estimate our inventoryturns would have been approximately 4.3 times for the first quarter of 2005,compared to 4.1 times for the first quarter of 2004, reflecting continuedimprovement in our inventory control efforts. The earlier transfer of title hasno impact on profit or cash flow.

 

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### **Liquidity andCapital Resources**

 

Netcash used by operations for the first three months of 2005 was $64.8 million,compared with $64.0 million for the first three months of 2004. The use of cashin the first three months of 2005 compared with 2004 was primarily due to anincrease in inventory and higher tax payments offset by an increase in accountspayable and higher net income.

 

Netcash used for investing activities amounted to $4.4 million in the first threemonths of 2005, compared with $3.6 million in the first three months of 2004.Capital expenditures in 2005 were $4.3 million versus $3.4 million in 2004,primarily driven by International investments. 

 

Netcash used for financing activities was $33.9 million in the first three monthsof 2005, compared with $13.6 million in the first three months of 2004. Cashflows from financing activities reflected share repurchases of $41.9 million inthe first three months of 2005, compared with $20.1 million in the first threemonths of 2004. We received cash inflows of $7.9 million in the first threemonths of 2005 from the issuance of common stock related to the exercise ofemployee stock options, compared with $6.6 million in the first three months of2004.

 

Wehave an unsecured committed revolving credit agreement with a group of banks,which matures on April 30, 2007 (“Agreement”), unless prior to April 30,2006, we elect to extend the final maturity date to April 30, 2008. TheAgreement provides for $200 million of committed borrowings, of which up to$125 million may be used for letters of credit. Under certain circumstances, wemay increase the committed borrowing limit by $50 million for a totalcommitment of $250 million. Under the terms of the Agreement, we may borrow atinterest rates based on eurodollar rates (approximately 2.87% at April 1,2005), plus an applicable margin based on a fixed-charge coverage grid ofbetween 50 and 100 basis points that is adjusted quarterly. At April 1,2005, the applicable margin under the facility was 60 basis points. We will paya commitment fee of 12.5 to 25 basis points per annum on the total commitment,based on a fixed-charge coverage grid that is adjusted quarterly. At April 1,2005, the commitment fee was 15 basis points. The Agreement places certainlimitations on additional debt, stock repurchases, acquisitions, amount ofdividends we may pay, and certain other financial and non-financial covenants.The primary financial covenants relate to maintaining a minimum fixed chargecoverage of 3:1, a leverage ratio of 1.5:1 and under certain conditions, aminimum level of earnings before income tax, depreciation and amortization. Wemeasure compliance with the financial and non-financial covenants and ratios asrequired by the terms of the Agreement on a fiscal quarter basis.

 

Wehad uncommitted lines of credit available from certain banks totaling $50million at April 1, 2005. Any borrowings under these lines would be atprevailing money market rates (3.4% at April 1, 2005). Further, we had anuncommitted letter of credit facility of $75 million to support inventorypurchases. These arrangements may be terminated at any time at the option ofthe banks or the Company.

 

Managementbelieves that our capital needs for 2005 will be met through our current cashbalances, our existing credit facilities and cash from operations, without theneed for additional permanent financing. However, as discussed in the exhibitto our Annual Report on Form 10-K entitled “Cautionary Statements forPurposes of the Safe Harbor Provisions of the Private Securities LitigationReform Act of 1995,” several risks and uncertainties could cause the Company toneed to raise additional capital through equity and/or debt financing. Fromtime to time the Company considers acquisition opportunities which, if pursued,could also result in the need for additional financing. The availability andterms of any such financing would be subject to prevailing market conditionsand other factors at that time.

 

OffBalance Sheet Arrangements

 

As of April 1,2005 and April 2, 2004, we had letters of credit outstanding of $16.7million and $13.3 million, respectively. These letters of credit were issuedpredominantly for the purchase of inventory. As of April 1, 2005, theCompany had $159.9 million in hedging contracts outstanding, all of which aredue to settle within the next 10 months (see Note 7).

 

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Wehave the following off balance sheet arrangements:

(Dollarsin Millions)

 

| **April 1, 2005** | ** ** | **Total Amounts  Committed** | ** ** |
|------------------------|------------|------------------------------|------------|
| Lines of credit        |       | $                            | —     |   |
|                   |       |                         |       |
| Letters of credit      |       | 16.7                         |       |
|                   |       |                         |       |
| Hedging contracts      |       | 159.9                        |       |
|                   |       |                         |       |
| Total                  |       | $                            | 176.6      |   |

 

We use funds from operationsand unsecured committed and uncommitted lines of credit as the primary sourcesof financing for our seasonal and other working capital requirements. Long-termdebt, if required, is generally used to finance long-term investments. Ourprincipal risks to these sources of financing are the impact on our financialcondition from economic downturns, a decrease in the demand for our products,increases in the prices of materials and a variety of other factors. Weanticipate that capital requirements for 2005 will be met through the use ofour current cash balances, through our existing credit facility (which placescertain limitations on additional debt, stock repurchases, acquisitions and onthe amount of dividends we may pay, and also contains certain other financialand operating covenants) and through cash flow from operations, without theneed for additional permanent financing. However, if the need arises, ourability to obtain any additional credit facilities will depend upon prevailingmarket conditions, our financial condition and the terms and conditions of suchadditional facilities.

 

NewAccounting Pronouncements

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123R, “Share-Based Payment.” This statement is a revision of SFASNo. 123 and supersedes APB Opinion No. 25 and its relatedimplementation guidance. SFAS No. 123R focuses primarily on accounting fortransactions in which an entity obtains employee services in exchange forshare-based payment transactions. The Statement requires entities to recognizestock compensation expense for awards of equity instruments to employees basedon the grant-date fair value of those awards (with limited exceptions). In April 2005,the Securities and Exchange Commission announced the adoption of a new rule thatamends the compliance dates for SFAS No. 123R. The Commission’s new rule allowsimplementation of SFAS No. 123R at the beginning of a company’s nextfiscal year instead of the first interim or annual reporting period that beginsafter June 15, 2005. We will adopt the statement on January 1, 2006.Our adoption of SFAS No. 123R will increase stock-based compensationexpense and decrease net income. In addition, SFAS No. 123R requires thatthe excess tax benefits related to stock-based compensation be reported as acash inflow from financing activities rather than a reduction of taxes paid incash from operations.

 

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**Forward-lookingInformation**

 

Asdiscussed in Exhibit 99.1 entitled “Cautionary Statements for Purposes ofthe Safe Harbor Provisions of the Private Securities Litigation Reform Act of1995,” of our Annual Report on Form 10-K for the year ended December 31,2004, investors should be aware of factors that could affect our actual resultsand could cause such results to differ materially from those contained inforward-looking statements made by or on behalf of us.  Such statements are based on currentexpectations only and actual future results may differ materially from thoseexpressed or implied by such forward-looking statements due to certain factors.These factors include, but are not limited to:

 

•                  Our ability to successfully market and sellour products in a highly competitive industry and in view of changing consumertrends, consumer acceptance of products, and other factors affecting retailmarket conditions, including the current U.S. economic environment and theglobal economic and political uncertainties resulting from the continuing waron terrorism;

•                  Our ability to locate and retain independentmanufacturers to produce lower cost, high-quality products with rapidturnaround times;

•                  Our ability to manage our foreign exchangerate risks;

•                  Our reliance on a limited number of keysuppliers;

•                  Our ability to obtain adequate materials atcompetitive prices;

•                  Our ability to successfully invest in ourinfrastructure and product based upon advance sales forecasts;

•                  Our ability to recover our investment in, andexpenditures of, our retail organization through adequate sales at such retaillocations; and

•                  Our ability to respond to actions of ourcompetitors, some of whom have substantially greater resources than ours.

 

Weundertake no obligation to update publicly any forward-looking statements,whether as a result of new information, future events or otherwise.

 

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**Item3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Inthe normal course of business, our financial position and results of operationsare routinely subject to a variety of risks, including market risk associatedwith interest rate movements on borrowings and investments and currency ratemovements on non-U.S. dollar denominated assets, liabilities and income. Weregularly assess these risks and have established policies and businesspractices that should result in an appropriate level of protection against theadverse effect of these and other potential exposures.

 

Weutilize cash from operations and U.S. dollar denominated borrowings to fund ourworking capital and investment needs. Short-term debt, if required, is used tomeet working capital requirements and long-term debt, if required, is generallyused to finance long-term investments. In addition, we use derivativeinstruments in our hedging of foreign currency transactions. These debtinstruments and derivative instruments are viewed as risk management tools andare not used for trading or speculative purposes. Cash balances are invested inhigh-grade securities with terms less than 3 months.

 

Wehave available unsecured committed and uncommitted lines of credit as sourcesof financing for our working capital requirements. Borrowings under thesecredit agreements bear interest at variable rates based on either lenders’ costof funds, plus an applicable spread, or prevailing money market rates. At April 1,2005 and April 2, 2004, we had no short-term or long-term debtoutstanding.

 

Ourforeign currency exposure is generated primarily from our European operatingsubsidiaries and, to a lesser degree, our Asian and Canadian operatingsubsidiaries. We seek to minimize the impact of these foreign currencyfluctuations by hedging the related transactions with foreign currency forwardcontracts. Currently, these foreign currency forward contracts will expire in10 months or less. Based upon sensitivity analysis as of April 1, 2005, a10% change in foreign exchange rates would cause the fair value of ourfinancial instruments to increase/decrease by approximately $16.3 million,compared with $18.4 million at April 2, 2004.

 

**Item 4.  CONTROLS AND PROCEDURES**

 

Wemaintain a system of disclosure controls and procedures which are designed toensure that information required to be disclosed by us in reports we file orsubmit under the Securities Exchange Act of 1934 (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Thesedisclosure controls and procedures include controls and procedures designed toensure that information required to be disclosed under the federal securitieslaws is accumulated and communicated to our management on a timely basis toallow decisions regarding required disclosure.

 

Basedon their evaluation as of April 1, 2005, our principal executive officerand principal financial officer have concluded that our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act were effective.

 

Otherthan as noted below, there were no changes in our internal control overfinancial reporting, as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act, that occurred during the quarter ended April 1, 2005,that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

Weimplemented additional controls surrounding the earlier transfer of title forcertain third party shipments related to our new sourcing arrangements withindependent suppliers. These controls include new procedures for insuringappropriate purchase cut-off consistent with the terms of the new sourcingarrangements.

 

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**Part II OTHERINFORMATION**

 

**Item2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

**ISSUER PURCHASES OF EQUITYSECURITIES(1)**

 

**For the Three Fiscal Months EndedApril 1, 2005**

 
| **Period***                | ** ** | **Total number  of shares  purchased **** | ** ** | **Average price  paid per share** | ** ** | **Total number  of shares  purchased as part  of publicly  announced  plans or programs** | ** **  | **Maximum number  of shares  that may yet  be purchased  under the plans  or programs** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------------------------|------------|
|                       |       |                                      |       |                              |       |                                                                                      |        |                                                                                    |       |
| Jan 1 – Jan 28        |       | 266,774                                   |       | $                                 | 64.07      |                                                                                      | 266,774     |                                                                                    | 2,149,364  |   |
| Jan 29 – Feb 25       |       | 151,465                                   |       | 68.92                             |       | 151,465                                                                                   |        | 1,997,899                                                                               |       |
| Feb 26 – April 1 |       | 200,347                                   |       | 71.55                             |       | 200,347                                                                                   |        | 1,797,552                                                                               |       |
| **Q1 Total**               | ** ** | **618,586**                               | ** ** | **$**                             | **67.68**  | ** **                                                                                | **618,586** | ** **                                                                              | ** ** | ** ** |

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**Footnote (1)**

 
| ** ** |       |             |       | **Approved**      |   |           |   |
|------------|------------|------------------|------------|-------------------|--------|----------------|--------|
| ** ** | ** ** | **Announcement** | ** ** | **Program**       |   | **Expiration** |   |
| ** ** | ** ** | **Date**         | ** ** | **Size (shares)** |   | **Date**       |   |
|       |       |             |       |              |   |           |   |
| Program 1  |       | 10/16/2003       |       | 4,000,000         |   | None           |   |

 

No existing programs expired orwere terminated during the reporting period. See Note 13 to our unauditedconsolidated financial statements in this Form 10-Q for additionalinformation.  Share and priceper share information is prior to the stock split. The Board approved a 100%increase in shares remaining under its previously announced repurchase programas of the April 14, 2005 record date to reflect the impact of the stocksplit. The increase was effective immediately after the May 2, 2005distribution date.

 

** Fiscal Month*

*** Based on trade date - notsettlement date*

 

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**Item 6.  EXHIBITS**

 

**(a)****               **Exhibits.

 

Exhibit 31.1– Principal Executive Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002, filed herewith.

 

Exhibit 31.2– Principal Financial Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002, filed herewith.

 

Exhibit 32.1– Chief Executive Officer Certification Pursuant to Section 1350, Chapter63 of Title 18, United States Code, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, furnished herewith.

 

Exhibit 32.2– Chief Financial Officer Certification Pursuant to Section 1350, Chapter63 of Title 18, United States Code, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, furnished herewith.

 

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**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 theundersigned thereunto duly authorized. 

 
|                     |   | THE  TIMBERLAND COMPANY |                                                                                             |
|--------------------------|--------|-------------------------|--------------------------------------------------------------------------------------------------|
|                     |   | (Registrant)            |
|                     |   |                    |
| Date:  May 10, 2005 |   | By:                     | /S/ BRIAN P.  MCKEON                                                                             |   |
|                     |   |                    | Brian P.  McKeon*Executive Vice President-Finance and  Administration, Chief  Financial Officer* |
|                     |   |                    |                                                                                             |
| Date:  May 10, 2005 |   | By:                     | /S/ JOHN  CRIMMINS                                                                               |   |
|                     |   |                    | John  Crimmins*Vice President, Corporate Controller and Chief  Accounting Officer*               |
|                     |   |                    |                                                                                             |
|                          |        |                         |                                                                                                  |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit**       | ** ** | **Description**                                                                                                                                                                                                    |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                                                                                                               |
| Exhibit 31.1 |       | Principal Executive Officer Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                         |
|              |       |                                                                                                                                                                                                               |
| Exhibit 31.2 |       | Principal Financial Officer Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                         |
|              |       |                                                                                                                                                                                                               |
| Exhibit 32.1 |       | Chief Executive Officer Certification Pursuant to  Section 1350, Chapter 63 of Title 18, United States Code, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished  herewith. |
|              |       |                                                                                                                                                                                                               |
| Exhibit 32.2 |       | Chief Financial Officer Certification Pursuant to  Section 1350, Chapter 63 of Title 18, United States Code, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished  herewith. |

 

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