**UNITEDSTATES 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 July 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                    ** |

 

**CommissionFile Number 1-9548**

 

**The Timberland Company**

(Exact Name ofRegistrant as Specified in Its Charter)

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes  ý    No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

Yes  ý    No  o

 

On July 29, 2005, 54,794,025shares of the registrant’s Class A Common Stock were outstanding and 11,743,660shares of the registrant’s Class B Common Stock were outstanding.

 

 

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**THETIMBERLAND COMPANY**

 

**FORM 10-Q**

 

**TABLE OFCONTENTS**

 
| ** **                                                                                                                           | **Page(s)** |
|--------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                                                                                                                 |        |
| **Part I  Financial Information (unaudited)**                                                                                   |        |
|                                                                                                                                 |        |
| **Item  1. Financial Statements**                                                                                                    |        |
| Unaudited Condensed  Consolidated Balance Sheets - July 1, 2005, July 2, 2004 and  December 31, 2004                  | 3           |
|                                                                                                                                 |        |
| Unaudited Condensed Consolidated  Statements of Income - For the three and six months ended July 1, 2005  and July 2, 2004 | 4           |
|                                                                                                                                 |        |
| Unaudited Condensed  Consolidated Statements of Cash Flows - For the six months ended July 1,  2005 and July 2, 2004       | 5           |
|                                                                                                                                 |        |
| Notes to Unaudited Condensed  Consolidated Financial Statements                                                                      | 6-12        |
|                                                                                                                                 |        |
| **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations**                             | 13-22       |
|                                                                                                                                 |        |
| **Item  3. Quantitative and Qualitative Disclosures About Market Risk**                                                              | 23          |
|                                                                                                                                 |        |
| **Item  4. Controls and Procedures**                                                                                                 | 23          |
|                                                                                                                                 |        |
| **Part II  Other Information**                                                                                                  |        |
|                                                                                                                                 |        |
| **Item 2. Unregistered Sales  of Equity Securities and Use of Proceeds**                                                             | 24          |
|                                                                                                                                 |        |
| **Item 4. Submission of  Matters to a Vote of Security Holders**                                                                     | 25          |
|                                                                                                                                 |        |
| **Item  6. Exhibits**                                                                                                                | 26          |
|                                                                                                                                 |        |
| Signatures                                                                                                                           | 27          |
|                                                                                                                                 |        |
| Exhibit Index                                                                                                                   | 28          |
|                                                                                                                                 |        |
| Exhibits                                                                                                                             | 29-32       |

 

2

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**PART I FINANCIAL INFORMATION**

##### **Item 1.  FINANCIALSTATEMENTS**

##### ** **

##### **THETIMBERLAND COMPANY**

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

(Dollars inThousands)

 
| ** **                                                                                                                                                                                                                                                                       | ** ** | **July 1, 2005** | ** ** | **July 2, 2004** | ** ** | **Dec. 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------|------------|
| **Assets**                                                                                                                                                                                                                                                                       |       |                  |       |                  |       |                   |       |
| Current assets                                                                                                                                                                                                                                                                   |       |                  |       |                  |       |                   |       |
| Cash  and equivalents                                                                                                                                                                                                                                                            |       | $                     | 189,831    |                  | $          | 163,631                |       | $ | 309,116 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $7,777 at July 1,  2005, $7,881 at July 2, 2004 and $8,927 at December 31, 2004                                                                                                                   |       | 130,638               |       | 131,926               |       | 155,024                |       |
| Inventory                                                                                                                                                                                                                                                                        |       | 216,483               |       | 170,931               |       | 128,311                |       |
| Prepaid  expense                                                                                                                                                                                                                                                                 |       | 29,075                |       | 25,618                |       | 27,659                 |       |
| Deferred  income taxes                                                                                                                                                                                                                                                           |       | 14,545                |       | 19,236                |       | 28,937                 |       |
| Derivative  assets                                                                                                                                                                                                                                                               |       | 6,360                 |       | —                |       | —                 |       |
| Total current assets                                                                                                                                                                                                                                                             |       | 586,932               |       | 511,342               |       | 649,047                |       |
| Property,  plant and equipment, net                                                                                                                                                                                                                                              |       | 76,718                |       | 75,947                |       | 78,979                 |       |
| Goodwill                                                                                                                                                                                                                                                                         |       | 14,163                |       | 14,163                |       | 14,163                 |       |
| Intangible  assets                                                                                                                                                                                                                                                               |       | 5,122                 |       | 3,809                 |       | 5,381                  |       |
| Other  assets, net                                                                                                                                                                                                                                                               |       | 10,061                |       | 9,768                 |       | 9,940                  |       |
| Total  assets                                                                                                                                                                                                                                                                    |       | $                     | 692,996    |                  | $          | 615,029                |       | $ | 757,510 |   |
|                                                                                                                                                                                                                                                                             |       |                  |       |                  |       |                   |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                    |       |                  |       |                  |       |                   |       |
| Current  liabilities                                                                                                                                                                                                                                                             |       |                  |       |                  |       |                   |       |
| Accounts  payable                                                                                                                                                                                                                                                                |       | $                     | 89,242     |                  | $          | 40,657                 |       | $ | 52,370 |   |
| Accrued  expense                                                                                                                                                                                                                                                                 |       |                  |       |                  |       |                   |       |
| Payroll  and related                                                                                                                                                                                                                                                             |       | 27,339                |       | 27,942                |       | 55,459                 |       |
| Other                                                                                                                                                                                                                                                                            |       | 45,523                |       | 37,569                |       | 68,579                 |       |
| Income  taxes payable                                                                                                                                                                                                                                                            |       | 8,158                 |       | 2,422                 |       | 34,737                 |       |
| Derivative  liabilities                                                                                                                                                                                                                                                          |       | —                |       | 9,212                 |       | 15,047                 |       |
| Total  current liabilities                                                                                                                                                                                                                                                       |       | 170,262               |       | 117,802               |       | 226,192                |       |
| Deferred  compensation and other liabilities                                                                                                                                                                                                                                     |       | 14,394                |       | 11,299                |       | 12,543                 |       |
| Deferred  income taxes                                                                                                                                                                                                                                                           |       | 5,814                 |       | 8,419                 |       | 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; 71,427,238 shares issued at July 1, 2005, 89,543,524 shares  issued at July 2, 2004 and 90,718,018 shares issued at December 31,  2004                             |       | 714                   |       | 895                   |       | 907                    |       |
| 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 July 1, 2005,  July 2, 2004 and December 31,  2004 |       | 117                   |       | 117                   |       | 117                    |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                      |       | 215,878               |       | 208,129               |       | 238,829                |       |
| Deferred  compensation                                                                                                                                                                                                                                                           |       | (34,307               | )          | (17,401               | )          | (22,584                | )          |
| Retained  earnings                                                                                                                                                                                                                                                               |       | 622,973               |       | 762,212               |       | 875,887                |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                                                          |       | 12,080                |       | 4,534                 |       | 10,228                 |       |
| Treasury  Stock at cost; 16,308,732 Class A shares at July 1, 2005,  30,379,274 Class A shares at July 2, 2004 and 34,098,914 Class A  shares at December 31, 2004                                                                                 |       | (314,929              | )          | (480,977              | )          | (591,877               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                 |       | 502,526               |       | 477,509               |       | 511,507                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                 |       | $                     | 692,996    |                  | $          | 615,029                |       | $ | 757,510 |   |

 

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

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

 

3

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**THETIMBERLAND COMPANY**

**UNAUDITEDCONDENSED****CONSOLIDATED STATEMENTS OFINCOME**

*(Amountsin Thousands, Except Per Share Data)*

 
| ** **                                | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **July 1,  2005**         | ** ** | **July 2,  2004**       | ** ** | **July 1,  2005** | ** ** | **July 2,  2004** | ** ** |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Revenue                                   |       | $                              | 240,269    |                         | $          | 230,210 |   | $ | 594,480 |   | $ | 551,987 |   |
| Cost  of goods sold                       |       | 122,289                        |       | 115,713                      |       | 289,339 |   | 271,039 |   |
| Gross  profit                             |       | 117,980                        |       | 114,497                      |       | 305,141 |   | 280,948 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Operating  expense                        |       |                           |       |                         |       |   |   |   |   |
| Selling                                   |       | 85,238                         |       | 81,316                       |       | 185,977 |   | 176,668 |   |
| General  and administrative               |       | 24,340                         |       | 21,101                       |       | 48,842 |   | 44,442 |   |
| Total  operating expense                  |       | 109,578                        |       | 102,417                      |       | 234,819 |   | 221,110 |   |
| Operating  income                         |       | 8,402                          |       | 12,080                       |       | 70,322 |   | 59,838 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Other  income/(expense)                   |       |                           |       |                         |       |   |   |   |   |
| Interest  income, net                     |       | 1,063                          |       | 206                          |       | 2,164 |   | 440 |   |
| Other,  net                               |       | 148                            |       | (87                          | )          | 1,138 |   | 206 |   |
| Total  other income/(expense)             |       | 1,211                          |       | 119                          |       | 3,302 |   | 646 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Income  before provision for income taxes |       | 9,613                          |       | 12,199                       |       | 73,624 |   | 60,484 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Provision  for income taxes               |       | 3,268                          |       | 4,331                        |       | 25,032 |   | 21,472 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Net  income                               |       | $                              | 6,345      |                         | $          | 7,868 |   | $ | 48,592 |   | $ | 39,012 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Earnings  per share                       |       |                           |       |                         |       |   |   |   |   |
| Basic                                     |       | $                              | .09        |                         | $          | .11 |   | $ | .72 |   | $ | .56 |   |
| Diluted                                   |       | $                              | .09        |                         | $          | .11 |   | $ | .71 |   | $ | .54 |   |
| Weighted-average  shares outstanding      |       |                           |       |                         |       |   |   |   |   |
| Basic                                     |       | 66,913                         |       | 70,197                       |       | 67,250 |   | 69,992 |   |
| Diluted                                   |       | 68,376                         |       | 72,102                       |       | 68,698 |   | 71,892 |   |

 

*Earningsper share and weighted-average shares have been restated to reflect the 2-for-1stock split in May 2005.*

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

 

4

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**THETIMBERLAND COMPANY**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Dollars inThousands)

 
| ** **                                                                     | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                     | ** ** | **July 1, 2005**        | ** ** | **July 2, 2004** | ** ** |
|                                                                           |       |                         |       |   |   |
| Cash  flows from operating activities:                                         |       |                         |       |   |   |
|                                                                           |       |                         |       |   |   |
| Net  income                                                                    |       | $                            | 48,592     |   | $ | 39,012 |   |
| Adjustments  to reconcile net income to net cash used by operating activities: |       |                         |       |   |   |
| Deferred  income taxes                                                         |       | 6,265                        |       | 6,752 |   |
| Amortization  of deferred compensation                                         |       | 1,323                        |       | 1,493 |   |
| Depreciation  and other amortization                                           |       | 12,451                       |       | 11,237 |   |
| Loss  on disposal of property, plant and equipment                             |       | 71                           |       | 60 |   |
| Tax  benefit from stock option plans                                           |       | 4,880                        |       | 9,174 |   |
| Increase/(decrease)  in cash from changes in working capital:                  |       |                         |       |   |   |
| Accounts  receivable                                                           |       | 17,110                       |       | (7,581 | ) |
| Inventory                                                                      |       | (89,945                      | )          | (51,451 | ) |
| Prepaid  expense                                                               |       | (2,993                       | )          | 251 |   |
| Accounts  payable                                                              |       | 38,809                       |       | 3,631 |   |
| Accrued  expense                                                               |       | (48,649                      | )          | (49,893 | ) |
| Income  taxes payable                                                          |       | (26,602                      | )          | (25,047 | ) |
| Other  liabilities                                                             |       | 1,170                        |       | — |   |
| Net  cash used by operating activities                                         |       | (37,518                      | )          | (62,362 | ) |
|                                                                           |       |                         |       |   |   |
| Cash  flows from investing activities:                                         |       |                         |       |   |   |
|                                                                           |       |                         |       |   |   |
| Additions  to property, plant and equipment                                    |       | (9,528                       | )          | (10,696 | ) |
| Other,  net                                                                    |       | (458                         | )          | (1,110 | ) |
| Net  cash used by investing activities                                         |       | (9,986                       | )          | (11,806 | ) |
|                                                                           |       |                         |       |   |   |
| Cash  flows from financing activities:                                         |       |                         |       |   |   |
|                                                                           |       |                         |       |   |   |
| Common  stock repurchases                                                      |       | (80,349                      | )          | (20,145 | ) |
| Issuance  of common stock                                                      |       | 13,546                       |       | 16,285 |   |
| Net  cash used by financing activities                                         |       | (66,803                      | )          | (3,860 | ) |
| Effect  of exchange rate changes on cash and equivalents                       |       | (4,978                       | )          | (144 | ) |
| Net  decrease in cash and equivalents                                          |       | (119,285                     | )          | (78,172 | ) |
| Cash  and equivalents at beginning of period                                   |       | 309,116                      |       | 241,803 |   |
| Cash  and equivalents at end of period                                         |       | $                            | 189,831    |   | $ | 163,631 |   |
|                                                                           |       |                         |       |   |   |
| Supplemental  disclosures of cash flow information:                            |       |                         |       |   |   |
| Interest  paid                                                                 |       | $                            | 205        |   | $ | 274 |   |
| Income  taxes paid                                                             |       | $                            | 39,980     |   | $ | 30,607 |   |

 

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

 

5

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**THETIMBERLAND COMPANY**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

*(Amountsin Thousands, Except Share and Per Share Data)*

 

**Note 1.  Summary of Significant Accounting Policies**

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements contain the adjustments necessary to present fairly The TimberlandCompany’s (“we”, “our”, “us”, “Timberland” or the “Company”) financialposition, results of operations and changes in cash flows for the interimperiods presented. Such adjustments consist of normal recurring items. Theunaudited 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.

 

Our revenue consists ofsales to wholesale customers, retail store revenues, license fees androyalties. We record wholesale revenues when title passes and the risks andrewards of ownership have passed to the customer, based on the terms of sale.Title passes generally upon shipment or upon receipt by the customer, dependingon the country of sale and the agreement with the customer. Retail storerevenues are recorded at the time of the sale. License fees and royalties arerecognized as earned per the terms of our licensing agreements.

 

In accordance withEmerging Issues Task Force (“EITF”) Issue No. 00-10, “Accounting forShipping and Handling Fees and Costs,” in the second quarter and the first sixmonths of 2005 we recorded $733 and $1,928 of reimbursed shipping expenseswithin revenues and the related shipping costs within selling expense,respectively. In the second quarter and the first six months of 2004 werecorded $976 and $2,184 of reimbursed shipping expenses within revenues andthe related shipping costs within selling expense, respectively. Shipping costsincluded in selling expense were $4,529 and $2,800 for the second quarters of2005 and 2004, and $9,011 and $7,200 for the first six months of 2005 and 2004,respectively.

 

We maintain allowancesfor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. We estimate potential losses primarilybased on our historical rate of credit losses and our knowledge of thefinancial condition of our customers.

 

**Note 2.   Historical Financial Results**

 

The results of operationsfor the three and six months ended July 1, 2005 are not necessarilyindicative of the results to be expected for the full year. Historically, ourrevenue has been more heavily weighted to the second half of the year.

 

**Note 3.  Stock Split**

 

On March 3, 2005,the Company announced that its Board of Directors approved a 2-for-1 split ofits Class A and Class B Common Stock. The additional shares weredistributed on May 2, 2005, to shareholders of record on April 14,2005. In addition, the Board of Directors approved the retirement of 10.0million Class A Treasury shares, on a pre-split basis. Additionally, theBoard also approved a 100% increase in shares remaining under its previouslyannounced repurchase program as of the April 14, 2005 record date toreflect the impact of the stock split. The increase was effective immediatelyafter the May 2, 2005 distribution date. The shares presented in theunaudited condensed consolidated balance sheets as of July 1, 2005, July 2,2004 and December 31, 2004, the number of shares used in the computationof earnings per share in the unaudited condensed consolidated statements ofincome for the three and six months ended July 1, 2005 and July 2,2004 and the shares and earnings per share in the notes to the unauditedcondensed consolidated financial statements were based on the number of sharesoutstanding after giving effect to the stock split, except as otherwise noted.

 

**Note 4.  Stock-based Compensation**

 

We apply AccountingPrinciple Board (“APB”) Opinion No. 25 and related interpretations inaccounting for our stock plans, Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accountingfor Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock-BasedCompensation-Transitional and Disclosure-An Amendment of FASB Statement No. 123”for disclosure purposes.

 

6

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In our unauditedcondensed consolidated statements of income, no compensation cost has beenrecognized for stock option grants issued under any of our stock option plans;however, the Company has recognized compensation cost for restricted stockawards. Had compensation cost for stock option grants issued been determinedunder the fair value method of SFAS No. 123, our net income and dilutedearnings per share for the three and six months ended July 1, 2005 and July 2,2004 would have been:

 
| ** **                                                                                                                                   | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **July 1, 2005**          | ** ** | **July 2, 2004**        | ** ** | **July 1, 2005** | ** ** | **July 2, 2004** | ** ** |
| Net  income as reported                                                                                                                      |       | $                              | 6,345      |                         | $          | 7,868 |   | $ | 48,592 |   | $ | 39,012 |   |
| Add:  Stock-based employee compensation expense included in reported net income,  net of related tax effect                                  |       | 437                            |       | 557                          |       | 873 |   | 963 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effect |       | 2,318                          |       | 2,690                        |       | 4,763 |   | 5,191 |   |
| Pro  forma net income                                                                                                                        |       | $                              | 4,464      |                         | $          | 5,735 |   | $ | 44,702 |   | $ | 34,784 |   |
| Basic  earnings per share, as reported                                                                                                       |       | $                              | .09        |                         | $          | .11 |   | $ | .72 |   | $ | .56 |   |
| Pro  forma basic earnings per share                                                                                                          |       | $                              | .07        |                         | $          | .08 |   | $ | .66 |   | $ | .50 |   |
| Diluted  earnings per share, as reported                                                                                                     |       | $                              | .09        |                         | $          | .11 |   | $ | .71 |   | $ | .54 |   |
| Pro  forma diluted earnings per share                                                                                                        |       | $                              | .07        |                         | $          | .08 |   | $ | .65 |   | $ | .48 |   |

 

The fair value of eachstock option granted for the three and six months ended July 1, 2005 and July 2,2004 under our plans was estimated on the date of grant using the Black-Scholesoption pricing model. The following weighted-average assumptions were used tovalue grants issued under our plans for the three and six months ended July 1,2005 and July 2, 2004, respectively:

 
| ** **               | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **July 1, 2005**          | ** ** | **July 2, 2004**        | ** ** | **July 1, 2005** | ** ** | **July 2, 2004** | ** ** |
| Expected  volatility     |       | 29.0                           | %          | 35.7                         | %          | 29.6 | % | 36.5 | % |
| Risk-free  interest rate |       | 4.1                            | %          | 3.1                          | %          | 3.6 | % | 1.8 | % |
| Expected  lives (years)  |       | 9.0                            |       | 6.2                          |       | 5.2 |   | 4.6 |   |
| Dividend  payments       |       | —                         |       | —                       |       | — |   | — |   |

 

The weighted-average fairvalues per share of stock options granted, for which exercise price equalsmarket value at the date of grant, were $16.76 and $12.35 for the three monthsended July 1, 2005 and July 2, 2004, respectively, and $11.66 and$10.34 for the six months ended July 1, 2005 and July 2, 2004, respectively.

 

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

 

Basic earnings per share(“EPS”) excludes common stock equivalents and is computed by dividing netincome by the weighted-average number of common shares outstanding for theperiods presented. Diluted EPS reflects the potential dilution that would occurif potentially dilutive securities such as stock options were exercised.Dilutive securities included in the calculation of diluted weighted-averageshares were 1,463,577 and 1,904,796 for the three months ended July 1,2005 and July 2, 2004, respectively, and 1,448,292 and 1,899,978 for thesix months of 2005 and 2004, respectively. Anti-dilutive securities excludedfrom the calculation of diluted weighted-average shares were 3,706 and 16,393for the second quarters of 2005 and 2004, respectively, and 66,071 and 769,761for the first six months of 2005 and 2004, respectively.

 

7

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**Note 6.  Goodwill and Other Intangible Assets**

 

We perform our annualimpairment tests at the end of our second fiscal quarter and determined that noimpairment of reported goodwill had occurred in 2005.

 

Information regarding ourother intangible assets, which consist of trademarks and patents, follows:

 
| **July 1, 2005** | ** ** | **July 2, 2004**         | ** ** | **December 31, 2004** | ** ** |
|-----------------------|------------|-------------------------------|------------|----------------------------|------------|
| **Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net**                    | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| $                     | 9,906      |                          | $          | (4,784                     | )          | $ | 5,122 |   | $ | 8,035 |   | $ | (4,226 | ) | $ | 3,809 |   | $ | 10,579 |   | $ | (5,198 | ) | $ | 5,381 |   |
|                       |            |                               |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense ofintangible assets with definite lives was $418 and $351 for the second quartersof 2005 and 2004, respectively, and $884 and $690 for the first six months of2005 and 2004, respectively. The estimated amortization for existing intangibleassets as of July 1, 2005, for each of the five succeeding fiscal years isas follows: 2005: $1,793; 2006: $1,555; 2007: $1,226; 2008: $921; 2009: $511.The amortization period for other intangible assets and related expenses isfive years.

 

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

 

All derivatives enteredinto by the Company are designated as either cash flow or fair value hedges.Cash flow hedges are derivative contracts hedging forecasted transactions. Fairvalue hedges are derivatives hedging existing foreign currency assets or liabilities.The change in value of cash flow hedges is recorded in other comprehensiveincome until the hedged transaction affects earnings, at which point the othercomprehensive income is reclassified to earnings. The change in value of fairvalue hedges is recorded in earnings and is largely offset by the change in thefair value of the underlying asset or liability. We are required to measure theeffectiveness of our cash flow hedges. If it is determined that a cash flowhedge is not effective, the ineffective portion of a derivative’s change infair value will be immediately recognized in earnings.

 

In the normal course ofbusiness, the financial position and results of operations of the Company areroutinely subject to currency rate movements in non-U.S. Dollar denominatedassets, liabilities and income as we purchase and sell goods in localcurrencies. We have established policies and business practices that shouldresult in an appropriate level of protection against the adverse effect ofthese exposures. We use derivative instruments, specifically forward contracts,to hedge a portion of our forecasted foreign currency transactions, typicallyfor a period not greater than 18 months. Those derivative instruments areviewed as risk management tools and are not used for trading or speculativepurposes. As of July 1, 2005, we had forward contracts maturing at variousdates through April 2006 to sell the equivalent of $180,752 in foreigncurrencies at contracted rates and to buy the equivalent of $40,207 in foreigncurrencies at contracted rates.  As of July 2,2004, we had forward contracts maturing at various dates through July 2005to sell the equivalent of $172,114 in foreign currencies at contracted ratesand to buy the equivalent of $8,166 in foreign currencies at contracted rates.

 

On July 1, 2005, July 2,2004 and December 31, 2004, we had derivative assets of $6,360 andderivative liabilities of $9,212 and $15,047, respectively. Those amountsreflect the fair value of our cash flow hedges. The $6,360 derivative assets atJuly 1, 2005 represent hedges in place through the first quarter of 2006.

 

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**Note 8.  Comprehensive Income**

 

Comprehensive income forthe three and six months ended July 1, 2005 and July 2, 2004 follows:

 
| ** **                                                              | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **July 1, 2005**          | ** ** | **July 2, 2004**        | ** ** | **July 1, 2005** | ** ** | **July 2, 2004** | ** ** |
| Net  income                                                             |       | $                              | 6,345      |                         | $          | 7,868 |   | $ | 48,592 |   | $ | 39,012 |   |
| Change  in cumulative translation adjustment                            |       | (8,846                         | )          | 346                          |       | (13,369 | ) | (946 | ) |
| Change  in fair value of derivative financial instruments, net of taxes |       | 10,203                         |       | (290                         | )          | 15,221 |   | 4,174 |   |
| Comprehensive  income                                                   |       | $                              | 7,702      |                         | $          | 7,924 |   | $ | 50,444 |   | $ | 42,240 |   |

 

For the three monthsended July 1, 2005 and July 2, 2004, the after tax hedging gains/(losses)reclassified to earnings were $367 and $(881), respectively, and for the sixmonths ended July 1, 2005 and July 2, 2004, the after tax hedginglosses reclassified to earnings were $(1,060) and $(3,267) respectively. Forthe three months ended July 1, 2005, actual rates were below hedgecontract rates, contributing to the hedging gain. During 2005 actual rates havebeen closer to hedge contract rates leading to a lower hedging loss for the sixmonths ended July 1, 2005 compared to July 2, 2004.

 

**Note9.  Business Segments and GeographicInformation**

 

We manage our business inthree reportable segments, each sharing similar product, distribution andmarketing. The reportable segments are U.S. Wholesale, U.S. Consumer Direct andInternational. The U.S. Wholesale segment is comprised of the sale of productsto wholesale customers in the United States. This segment also includesroyalties from licensed products sold in the United States and the managementcosts and expenses associated with our worldwide licensing efforts. Thissegment now includes some marketing expenses and value added servicespreviously in Unallocated Corporate. The U.S. Consumer Direct segment includesthe Company-operated specialty and factory outlet stores in the United States andour e-commerce business. The International segment consists of the marketing,selling and distribution of footwear, apparel and accessories and licensedproducts outside of the United States. Products are sold outside of the UnitedStates through our subsidiaries (which use wholesale and retail channels tosell footwear, apparel and accessories), independent distributors andlicensees.

 

The Unallocated Corporatecomponent of segment reporting consists primarily of corporate finance,information services, legal and administrative expenses, United Statesdistribution expenses, a majority of United States marketing expenses,worldwide product development and other costs incurred in support of Company-wideactivities. Unallocated Corporate also includes total other income/(expense),which is primarily interest income, net, and other miscellaneous income/(expense),net. Such income/(expense) is not allocated among the reported businesssegments.

 

The accounting policiesof the segments are the same as those described in the summary of significantaccounting policies. We evaluate segment performance based on operatingcontribution, which represents pre-tax income before unallocated corporateexpenses, interest and other expenses, net, and on operating cash flow measurements.Total assets are disaggregated to the extent that assets apply specifically toa single segment. Unallocated Corporate assets primarily consist of cash andequivalents, manufacturing/sourcing assets, computers and related equipment,and United States transportation and distribution equipment.

 

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**For the Three Months Ended July 1, 2005 and July 2, 2004**

 
| ** **                         | ** ** | **U.S.  Wholesale** | ** ** | **U.S.  Consumer  Direct** | ** ** | **International** | ** ** | **Unallocated  Corporate** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|---------------------|------------|----------------------------|------------|-------------------|------------|----------------------------|------------|------------------|------------|
| **2005**                           |       |                |       |                       |       |              |       |                       |       |             |       |
| Revenue                            |       | $                   | 100,524    |                       | $          | 34,985            |       | $                          | 104,760    |             | $          | — |   | $ | 240,269 |   |
| Operating  income/(loss)           |       | 28,962              |       | 2,768                      |       | 9,096             |       | (32,424                    | )          | 8,402            |       |
| Income/(loss)  before income taxes |       | 28,962              |       | 2,768                      |       | 9,096             |       | (31,213                    | )          | 9,613            |       |
| Total  assets                      |       | 197,646             |       | 30,727                     |       | 271,961           |       | 192,662                    |       | 692,996          |       |
| Goodwill                           |       | 6,804               |       | 794                        |       | 6,565             |       | —                     |       | 14,163           |       |
|                               |       |                |       |                       |       |              |       |                       |       |             |       |
| **2004**                           | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **       | ** ** |
| Revenue                            |       | $                   | 104,432    |                       | $          | 34,590            |       | $                          | 91,188     |             | $          | — |   | $ | 230,210 |   |
| Operating  income/(loss)           |       | 31,959              |       | 2,555                      |       | 7,730             |       | (30,164                    | )          | 12,080           |       |
| Income/(loss)  before income taxes |       | 31,959              |       | 2,555                      |       | 7,730             |       | (30,045                    | )          | 12,199           |       |
| Total  assets                      |       | 176,434             |       | 28,678                     |       | 195,001           |       | 214,916                    |       | 615,029          |       |
| Goodwill                           |       | 6,804               |       | 794                        |       | 6,565             |       | —                     |       | 14,163           |       |

 

### **Forthe Six Months Ended July 1, 2005 and July 2, 2004**

 
| ** **                         | ** ** | **U.S.  Wholesale** | ** ** | **U.S.  Consumer  Direct** | ** ** | **International** | ** ** | **Unallocated  Corporate** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|---------------------|------------|----------------------------|------------|-------------------|------------|----------------------------|------------|------------------|------------|
| **2005**                           |       |                |       |                       |       |              |       |                       |       |             |       |
| Revenue                            |       | $                   | 217,342    |                       | $          | 73,304            |       | $                          | 303,834    |             | $          | — |   | $ | 594,480 |   |
| Operating  income/(loss)           |       | 65,384              |       | 7,234                      |       | 64,296            |       | (66,592                    | )          | 70,322           |       |
| Income/(loss)  before income taxes |       | 65,384              |       | 7,234                      |       | 64,296            |       | (63,290                    | )          | 73,624           |       |
|                               |       |                |       |                       |       |              |       |                       |       |             |       |
| **2004**                           | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **       | ** ** |
| Revenue                            |       | $                   | 215,780    |                       | $          | 72,367            |       | $                          | 263,840    |             | $          | — |   | $ | 551,987 |   |
| Operating  income/(loss)           |       | 69,164              |       | 5,951                      |       | 47,870            |       | (63,147                    | )          | 59,838           |       |
| Income/(loss)  before income taxes |       | 69,164              |       | 5,951                      |       | 47,870            |       | (62,501                    | )          | 60,484           |       |

 

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**Note 10.  Inventory**

 

Inventory consists of thefollowing:

 

| ** **      | ** ** | **July 1,  2005** | ** ** | **July 2,  2004** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|------------------------|------------|------------------------|------------|-----------------------------|------------|
| Materials       |       | $                      | 3,368      |                   | $          | 3,843                       |       | $ | 3,752 |   |
| Work-in-process |       | 1,612                  |       | 1,563                  |       | 1,364                       |       |
| Finished  goods |       | 211,503                |       | 165,525                |       | 123,195                     |       |
| Total           |       | $                      | 216,483    |                   | $          | 170,931                     |       | $ | 128,311 |   |

 

Inthe fourth quarter of 2004, we established a Hong Kong procurement company andinternational treasury center in Switzerland. Related to the implementation ofthe new organizational structure, we modified certain sourcing arrangements,which resulted in earlier transfer of title for a portion of the Company’sthird party sourced product in 2005. Earlier transfer of title resultedin offsetting 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 second quarter of 2004, we estimate that inventory and accounts payablebalances would have increased by approximately $32.8 million. Adjusting forthis change, on a comparable basis, inventory rose 6.3%.

 

**Note 11.  Restricted Stock Awards and Other**

 

In 2004, our Board ofDirectors approved future awards of restricted share grants of Class ACommon Stock under the Company’s 1997 Incentive Plan, as amended, and a cashincentive award. The award of these restricted share grants and the cashincentive award is based on achieving certain performance targets for theperiods occurring between January 1, 2004 through December 31, 2006.Based on the achievement of 2004 performance targets, 275,117 of restrictedshares were awarded on July 5, 2005. The value of these shares at July 1,2005 was $10,873. These shares will vest equally over three years from theaward date. An additional grant of 200,000 restricted shares with a fair marketvalue of $7,754 at July 1, 2005, based on the achievement of a separateperformance target, were also awarded on July 5, 2005. These shares willvest two years after the award date. These shares will be subject torestrictions on sale and transferability, a risk of forfeiture and certainother terms and conditions. Accordingly, we recorded deferred compensation onour balance sheet to reflect these future awards. For the period January 1,2005 through December 31, 2006, grants of $9,185 and $9,509 will be madein 2006 and 2007, respectively, if certain targeted performance goals areachieved. The award amount will vary based upon the degree to which theseperformance goals are attained. The number of shares to be awarded will bedetermined by the share price at that date. Additionally, the cash incentiveaward of up to $3,000 is based on achievement of a performance target over athree year measurement period from January 1, 2004 to December 31,2006, and may be awarded in 2007.

 

In March 2005, ourBoard of Directors approved a cash incentive award.  This cash incentive award of up to $1,250 isbased on achievement of a performance target over a one year measurement periodfrom January 1, 2005 to December 31, 2005, and may be awarded in2007.

 

**Note 12.  Income Taxes**

 

The effective tax ratefor the three and six months ended July 1, 2005 and July 2, 2004 was34.0% and 35.5%, respectively. 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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**Note 13.  Share Repurchase**

 

On September 23,2003, our Board of Directors approved an additional repurchase of 4,000,000shares of our Class A Common Stock. On March 3, 2005, our Board ofDirectors approved a 100% increase in shares remaining under its previouslyannounced repurchase program as of April 14, 2005, the record date of the 2-for-1stock split. The increase was effective immediately after the May 2, 2005distribution date. As of July 1, 2005, on a post split basis, 2,583,065shares remained under this authorization. Shares repurchased on a post splitbasis totaled 1,012,039 during the quarter ended July 1, 2005. We may userepurchased shares to offset future issuances under the Company’s stock-basedemployee incentive plans or for other purposes. From time to time, we use Rule 10b5-1plans to facilitate share repurchases.

 

**Note 14.  Litigation**

 

We are involved invarious litigation and legal matters that have arisen in the ordinary course ofbusiness. Management believes that the ultimate resolution of any existingmatter will not have a material adverse effect on our consolidated financialstatements.

 

**Note 15.  Subsequent Event**

 

On July 6, 2005, theCompany announced plans to consolidate Caribbean manufacturing operations. Wewill close our manufacturing facility in Isabela, Puerto Rico at the end of2005 and expand manufacturing volume in our facility based in the DominicanRepublic. We will incur one-time pre-tax restructuring costs of approximately$2.5 million in the third quarter of 2005, $3.0 million in the fourth quarterof 2005 and $0.5 million in the first quarter of 2006 to cover severance,retirement enhancements, outplacement services and asset disposal costsassociated with implementation of this consolidation. The efficiencies of theconsolidated operations are anticipated to yield cost savings of approximately$4.0 million in 2006, with benefits weighted toward the second half of theyear, and annual cost savings of approximately $5.0 million in subsequentyears. The Company’s tax benefit from its Puerto Rico operations under Section 30Aof the Internal Revenue Code, approximating $4.0 million annually, expires atthe end of 2005. We do not anticipate an increase in our overall effective taxrate of 34.0% in 2006, however, due to expected benefits from global taxinitiatives.

 

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**Item 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussesThe 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 by management, should beread in conjunction with the unaudited condensed consolidated financialstatements and related notes. Included is a discussion and reconciliation oftotal Company and International revenue growth to constant dollar revenuegrowth. Constant dollar revenue growth, which excludes the impact of changes inforeign exchange rates, is not a Generally Accepted Accounting Principle (“GAAP”)performance measure. We provide constant dollar revenue growth for total Companyand International results because we use the measure to understand revenuegrowth excluding any impact from foreign exchange rate changes.

 

#### **Critical Accounting Policies**

#### ** **

Our discussion andanalysis of our financial condition and results of operations are based uponour unaudited condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited 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 formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Historically, actual results have notbeen materially different from our estimates. Because of the uncertaintyinherent in these matters, actual results could differ from the estimates usedin applying our critical accounting policies. Currently, the Company is notaware of any reasonably likely events or circumstances that would result inmaterially different amounts being reported. Our significant accountingpolicies are described in Note 1 to the Company’s consolidated financialstatements of our Annual Report on Form 10-K for the year ended December 31,2004. Our estimates, assumptions and judgments involved in applying thecritical accounting policies are described in the Management’s Discussion andAnalysis of Financial Condition and Results of Operations section of ourAnnual Report on Form 10-K for the year ended December 31, 2004.

 

#### **Overview**

#### ** **

Our principal strategicgoal is to become the authentic outdoor brand of choice globally. We continueto develop a diverse portfolio of footwear, apparel and accessories thatreinforces the functional performance, benefits and classic styling thatconsumers have come to expect from our brand. We sell our products to consumerswho embrace an outdoor-inspired lifestyle through high-quality distributionchannels, including our own retail stores, which reinforce the premiumpositioning of the Timberlandâbrand.

 

To deliver against ourlong-term goals, we are focused on driving progress on key strategic fronts.These include enhancing our leadership position in our core footwear business,capturing the opportunity that we see for outdoor-inspired apparel, extendingbrand reach through development of the Timberland PROâseries and brand building licensing arrangements, expanding geographically,driving operational and financial excellence while setting the standard forcommitment to the community and striving to be a global employer of choice.

 

Highlights of our secondquarter of 2005 financial performance, compared to the second quarter of 2004,include the following:

 

•                  Revenuesincreased 4.4% to $240.3 million, driven by 14.9% growth in our Internationaloperations.

 

•                  Operatingprofit decreased 30.4% to $8.4 million, reflecting anticipated sales and profitpressures in the U.S. business.

 

•                  Operatingmargin decreased 170 basis points to 3.5%.

 

•                  Grossmargin declined 60 basis points driven by higher off-price sales and productmix impacts in the U.S. business.

 

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•                  Operatingexpense as a percent of sales increased 110 basis points reflecting impactsfrom U.S. revenue declines and increased investments in the internationalbusiness.

 

•                  Netincome decreased 19.4% to $6.3 million.

 

•                  Dilutedearnings per share decreased 18.2% from $0.11 to $0.09.

 

•                  Cashat the end of the quarter was $189.8 million with no debt outstanding.

 

**Results of Operations****for the Three Months Ended July 1, 2005 and July 2,2004**

 

# Revenue

 

Consolidated revenuegrowth of 4.4% in the second quarter of 2005 reflected double-digit constantdollar gains in international markets which offset moderate declines in theU.S. International revenues were $104.8 million, 14.9% ahead of the secondquarter of 2004, or 10.8% in constant dollars. International gains reflectedstrong growth in Northern Europe and Asia. U.S. business revenue totaled $135.5million in the second quarter of 2005, down 2.5% from the prior-year period,reflecting anticipated decreases in footwear sales impacted by retailer cautionfollowing soft prior year sell-through results. U.S. revenues were supported byhigher levels of off-price sales linked to inventory control efforts, whichadded approximately 3.0% to overall revenue growth. Global revenue results werepressured by an earlier phasing of customer orders in the first half of 2005,driven in part by an earlier Easter timing this year, which benefited firstquarter results. Changes in currency exchange rates were responsible for 1.6%of consolidated revenue growth. We anticipate that negative impacts fromforeign exchange rate trends will pressure revenue growth for the balance ofthis year.

 

Segments Review 

 

We have three reportablebusiness segments (see Note 9): U.S. Wholesale, U.S. Consumer Direct andInternational.

 

Revenues for our U.S.Wholesale business decreased 3.7% to $100.5 million, driven by lower sales ofboots, women’s casual and kids’ product. These decreases offset double-digitgrowth in Timberland brand apparel, Timberland PROâfootwear and outdoor performance footwear sales – and solid gains in men’scasual wholesale footwear revenues.

 

Timberland’s U.S. ConsumerDirect business expanded 1.1% to $35.0 million, benefiting from comparablestore sales gains of 1.3% and continued growth in Timberland’s e-commercebusiness. During the second quarter, we opened two new outlet stores and aretargeting additional openings in the range of five stores later this year.

 

International revenuesfor the first quarter of 2005 expanded 14.9%, or 10.8% in constant dollars, to$104.8 million. International growth was balanced across major productcategories, reflecting strong gains in both footwear and apparel and accessorysales. Overall, International revenues increased to 43.6% of total consolidatedrevenues.

 

European revenueswere $73.4 million, up 13.9% compared to the prior-year period, with anincrease of 9.2% in constant dollars. Revenue growth was driven by continuedstrong growth in the UK and gains in key expansion markets such as Spain and Scandinavia.European growth continues to be driven by strong footwear growth, supported bydouble-digit gains in kids’ and boots sales. Apparel revenues were also upsolidly, in part reflecting gains in “at-once” sales as customers order relativelycloser to need. Apparel sales results continue to benefit from investments instore refurbishments over the past several months. In the second quarter, wecontinued to expand our integrated presence at retail, adding two specialtystores in London.

 

In Asia, second quarterof 2005 revenues grew 18.5%, or 16.1% in constant dollars, to $27.7 million, drivenby gains in key regions including double-digit growth in Hong Kong, Taiwan,Singapore and Malaysia and solid growth in Japan.  Growth was driven by strong gains in boots,outdoor performance footwear and apparel.

 

Products

 

Worldwide footwear revenuewas $177.6 million in the second quarter of 2005, up $4.2 million or 2.4% fromthe prior-year period. Excluding the benefit of foreign exchange, footwearrevenues increased 1.2%. Growth was driven by global gains in

 

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outdoor performance, kids’,Timberland PROâ series, andmen’s casual footwear. Worldwide footwear unit sales were up 5.8%, while theaverage price decreased by 3.2%, reflecting higher levels of off-price sales inthe U.S. and impacts from product and channel mix, offset by foreign exchangerate benefits.

 

Worldwide apparel andaccessories revenue for the second quarter of 2005 grew by 9.0% to $59.6million. Excluding the benefit of foreign exchange, apparel and accessoriesrevenue increased 7.1%. Apparel and accessories unit sales increased 5.3% whileaverage selling prices increased 3.5%, reflecting favorable foreign currencyimpacts and product mix benefits.

 

Channels 

 

Revenue growth in thesecond quarter of 2005 was balanced across channels, with wholesale revenues up4.4% to $168.8 million and retail revenues also up 4.4% to $71.5 million.Worldwide comparable store sales increased 0.7%. Globally, we opened ten retaillocations and closed two in the second quarter of 2005.

 

Gross Profit

 

Gross profit as apercentage of sales, or gross margin, was 49.1% for the second quarter of 2005,60 basis points lower than second quarter 2004 gross margin. The decrease in grossmargin reflected lower U.S. gross margins, impacted by higher levels of off-priceand discounted sales, and product mix. These impacts were partially offset byfavorable international business growth and product mix benefits.

 

We include the costs ofprocuring inventory (inbound freight and duty, overhead and other similarcosts) in cost of goods sold. These costs amounted to $21.8 million and $22.2million for the second quarters of 2005 and 2004, respectively.

 

Operating Expense

 

Operating expense for thesecond quarter of 2005 was $109.6 million, 7.0% higher than the $102.4 millionreported in the 2004 second quarter. As a percentage of revenue, operatingexpense increased 110 basis points to 45.6%. The operating expense increase wasdriven by a $3.9 million increase in selling expenses and a $3.2 millionincrease in general and administrative expenses. Foreign exchange rate changesadded $1.4 million, or 1.4%, to overall operating expense growth. We intend tocontinue to invest behind strategic initiatives, including our global brandbuilding efforts and expect operating expense to outpace revenue growth for thebalance of this year. We also will incur one-time pre-tax restructuring costsof approximately $5.5 million in the second half of 2005 related to the closureof our Puerto Rico manufacturing facility (see Note 15).

 

Selling expense for thesecond quarter of 2005 was $85.2 million, $3.9 million, or 4.8%, higher than inthe second quarter of 2004. The increase was driven by $1.8 million indistribution costs, $1.3 million of costs related to international retailexpansion and $0.7 million in product development costs offset by decreases ofapproximately $0.9 million in marketing expenditures and $0.3 million inincentive compensation programs. Foreign exchange rate changes added $1.3million, or 1.5%, to overall selling expense growth.

 

We include the costs ofphysically managing inventory (warehousing and handling costs) in sellingexpense. These costs totaled $8.6 million and $7.5 million in the secondquarters of 2005 and 2004, respectively.

 

Advertising expense,which is also included in selling expense, was $4.1 million and $6.3 million inthe second quarters of 2005 and 2004, respectively. The decrease primarilyreflected reductions in U.S. cooperative advertising costs. Advertising costsare expensed at the time the advertising is used, predominantly in the seasonthat the advertising costs are paid. On both July 1, 2005 and July 2, 2004, wehad $0.9 million of prepaid advertising recorded on our consolidated balancesheets.

 

General andadministrative expense for the second quarter of 2005 was $24.3 million, $3.2million, or 15.3%, higher than the prior-year period. As a percentage ofrevenue, general and administrative expense increased by 100 basis points,compared with the prior-year period. The increase reflected investments inorganizational capability in the international business, enhanced globalsupport services and increased legal and compliance costs. Foreign exchangerate changes also added approximately $0.1 million, or 0.7%, to overall generaland administrative expense growth.

 

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Operating Income

 

Operating income for thesecond quarter of 2005 was $8.4 million, $3.7 million, or 30.4% lower thansecond quarter 2004.  Operating income asa percentage of revenue decreased 170 basis points to 3.5%.

 

Operating income for ourU.S. Wholesale segment was $29.0 million, $3.0 million, or 9.4% lower than theprior-year period. The revenue decrease of 3.7% and gross margin decline of 270basis points were offset by a 90 basis point improvement in operating expenseas a percentage of revenue.  Theseresults reflected retailer caution following soft prior year sell-throughresults and impacts from higher levels of off-price sales related to inventorycontrol efforts. We anticipate these factors will continue to pressure U.S.results for the balance of 2005.

 

Our U.S. Consumer Directsegment’s operating income for the 2005 second quarter increased to $2.8million, or 8.3% higher than the prior-year period. Revenue growth of 1.1% wascomplemented by a 30 basis point increase in gross margin, as well as costefficiencies, reflecting our focus on enhancing returns at our retaillocations.

 

Operating income for ourInternational segment grew by 17.7% to $9.1 million, driven by revenue growthof 14.9% and an 80 basis point improvement in operating expense as a percentageof sales. Both benefited from favorable foreign exchange rates. The expansionin gross margin also reflected favorable product mix reflecting strong footwearsales.

 

Our Unallocated Corporateexpenses, which include central support and administrative costs, not allocatedto our business segments, increased 7.5% to $32.4 million. UnallocatedCorporate expenses as a percentage of total revenue increased 40 basis pointsto 13.5% of total revenue.

 

# Other Income and Taxes

 

Interest income, net, which is comprised of interest income offset byfees related to the establishment and maintenance of our revolving creditfacility and interest paid on short-term borrowings, was $1.1 million and $0.2million for the second quarters of 2005 and 2004, respectively. Higher interestrates and higher cash balances supported the increase in net interest income.While we expect continued benefits from relatively higher interest rates this year,we expect the year over year gains in interest income will narrow in futurequarters reflecting the seasonality of our cash flow.

 

Other, net included $0.8 million of foreign exchange losses resultingfrom the timing of settlement of local currency denominated receivables andpayables. These losses were driven by the volatility of exchange rates withinthe second quarter of 2005, and should not be considered indicative of expectedfuture results.

 

The effective income taxrate was 34.0% in the second quarter of 2005, compared to 35.5% in the secondquarter of 2004. We established a Hong Kongprocurement company and international treasury center in Switzerland in thefourth quarter of 2004, which better aligns our organizational structure withour expanding global presence and reduces our estimated taxes on foreignearnings.

 

**Results of Operations****for the Six Months Ended July 1, 2005 and July 2,2004**

 

# Revenue

 

Consolidated revenuegrowth of 7.7% in the first half of 2005 reflected double-digit constant dollargains in our International business and modest gains in our U.S. business. U.S.business revenue totaled $290.6 million in the first half of 2005, up 0.9% overthe prior-year period. International revenues were $303.8 million, 15.2% aheadof the first half of 2004, or 10.9% in constant dollars. Overall, changes incurrency exchange rates were responsible for 2.0% of consolidated revenuegrowth.

 

Segments Review 

 

Revenues for our U.S.Wholesale business increased 0.7% to $217.3 million, driven by double-digitgrowth in Timberland PROâ footwear, men’s casual footwear,apparel and accessories, and outdoor performance footwear. 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,and modest declines in boots and kids’ footwear. Overall, U.S. Wholesalebusiness growth was supported by higher levels of off-price sales related toinventory control efforts.

 

16

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U.S. Consumer Directposted solid performance in the first half with comparable store sales gains of2.6%, supported by solid footwear growth, which benefited from first quarterwinter weather conditions. Our e-commerce business also posted strong revenuegains. Sales gains were driven by growth in boots and kids’, offset by modestdeclines in women’s casual footwear, and apparel. U.S. Consumer Direct revenuesfor the first half expanded $0.9 million, or 1.3%, to $73.3 million, withoverall growth impacted by a decrease in U.S. store count over the past year.

 

International revenuesfor the first half of 2005 increased 15.2% to $303.8 million, benefiting fromstrong growth in our kids’ and boots footwear categories, foreign exchange ratebenefits and solid growth from apparel and outdoor performance footwear.Overall, International revenues increased to 51.1% of total consolidatedrevenues.

 

European revenues were$235.7 million, up 15.8% compared to the prior-year period, with an increase of11.1% on a constant dollar basis. Revenues were driven by growth in keyEuropean markets such as the UK, Scandinavia, Benelux, Spain, France, and Italy.European footwear sales gains were driven by double-digit constant dollar gainsin kids’ and boots. Apparel sales were also up moderately, reflecting benefitsfrom our enhanced focus on Timberland’s core heritage consumer.

 

In Asia, first half 2005revenues grew 14.4%, or 11.9% in constant dollars, to $59.3 million, reflectingstrong gains in key regions, including double-digit gains in importantSoutheast Asia markets such as Taiwan and Hong Kong and solid growth in Japan.Growth was driven by strong gains in apparel and key footwear categories suchas boots and outdoor performance.

 

Products

 

Worldwide footwearrevenue was $443.6 million in the first half of 2005, up $30.9 million or 7.5%from the prior-year period. Excluding the benefit of foreign exchange, footwearrevenues increased 5.7%. Growth was driven by global gains in kids’, boots,outdoor performance, men’s casual, and Timberland PROâseries footwear. Worldwide footwear unit sales were up 9.4%, while the averageprice decreased by 1.8%, reflecting higher levels of off-price sales and impactsof product mix, offset by foreign exchange rate benefits.

 

Worldwide apparel andaccessories revenue for the first half of 2005 grew by 7.6% to $144.2 million.Excluding the benefit of foreign exchange, apparel and accessories revenueincreased 5.4%. Apparel and accessories unit sales increased 5.3% while averageselling prices increased 2.2%, reflecting favorable foreign currency impacts.

 

Channels 

 

Revenue growth in the firsthalf of 2005 reflected strong global gains in the wholesale channel and solidgains in the consumer direct channels. Global wholesale revenues grew 8.7% to$444.4 million while global consumer direct revenues increased 4.8% to $150.1million. Worldwide comparable store sales increased 3.1%. Globally, we openedsixteen retail locations and closed thirteen in the first half of 2005.

 

Gross Profit

 

Gross profit as apercentage of sales, or gross margin, was 51.3% for the first half of 2005, 40basis points higher than first half 2004 gross margin. Foreign exchange ratetrends, benefits from favorable hedge rate changes and lower product relatedcosts drove the improvement, offset by impacts from higher levels of off-priceand discounted sales.

 

We include the costs ofprocuring inventory (inbound freight and duty, overhead and other similarcosts) in cost of goods sold. These costs amounted to $43.1 million and $42.3million for the first halves of 2005 and 2004, respectively.

 

Operating Expense

 

Operating expense for thefirst half of 2005 was $234.8 million, 6.2% higher than the $221.1 millionreported in the 2004 first half. As a percentage of revenue, operating expensedecreased 60 basis points to 39.5%. The operating expense increase was drivenby a $9.3 million increase in selling expenses and a $4.4 million increase ingeneral and administrative expenses. Foreign exchange rate changes added $3.3million, or 1.5%, to overall operating expense growth.

 

Selling expense for thefirst half of 2005 was $186.0 million, $9.3 million, or 5.3% higher than in thefirst half of 2004. The

 

17

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increase was driven by $3.1million of costs related to international retail expansion, $3.0 million indistribution costs and $1.1 million in product development costs offset by adecrease of $1.5 million in incentive compensation programs. Foreign exchangerate changes added $3.0 million, or 1.7%, to overall selling expense growth.

 

We include the costs ofphysically managing inventory (warehousing and handling costs) in sellingexpense. These costs totaled $17.6 million and $15.8 million in the first halfof 2005 and 2004, respectively.

 

Advertising expense,which is also included in selling expense, was $11.3 million and $13.7 millionin the first halves of 2005 and 2004, respectively. The decrease primarilyreflected reductions in U.S. cooperative advertising costs. Advertising costsare expensed at the time the advertising is used, predominantly in the seasonthat the advertising costs are paid.

 

General andadministrative expense for the first half of 2005 was $48.8 million, $4.4million, or 9.9% higher than the prior-year period. As a percentage of revenue,general and administrative expense increased by 10 basis points, compared withthe prior-year period. The increase reflected enhanced global support services,increased legal and compliance costs, investments in organizational capabilityin the international business and increased costs associated with our incentivecompensation programs.  Foreign exchangerate changes also added approximately $0.3 million, or 0.7%, to overall generaland administrative expense growth.

 

Operating Income

 

Operating income for thefirst half of 2005 was $70.3 million, $10.5 million, or 17.5% higher than the firsthalf of 2004.  Operating income as apercentage of revenue expanded 100 basis points to 11.8%.

 

Operating income for ourU.S. Wholesale segment was $65.4 million, $3.8 million, or 5.5% lower than theprior-year period. Revenue growth of 0.7% was offset by a 300 basis pointdecline in gross margin. The decrease in margin was driven by higher levels ofoff-price sales related to inventory control efforts and product mix impacts.

 

Our U.S. Consumer Directsegment’s operating income for the 2005 first half increased to $7.2 million,or 21.6% higher than the prior period. The increase was driven by 1.3% revenuegrowth and a 170 basis point decrease in operating expense as a percentage ofsales reflecting leveraged variable store expenses and real estate portfoliomanagement.

 

Operating income for ourInternational segment grew by 34.3% to $64.3 million for the first half. Revenuegrowth of 15.2% and a 240 basis point gross margin improvement drove much ofthe increase. Both benefited from favorable foreign exchange rate changes. Theexpansion in gross margin also reflected favorable product mix reflectingstrong footwear sales and lower product costs resulting from enhanced supplychain execution offset by relatively higher markdowns related to inventorycontrol efforts. Operating expense rates for our International segmentdecreased 70 basis points.

 

Our Unallocated Corporateexpenses, which include central support and administrative costs, not allocatedto our business segments, increased 5.5% to $66.6 million, below the rate ofrevenue growth. Unallocated Corporate expenses as a percentage of total revenuefell 20 basis points to 11.2% of total revenue.

 

# Other Income and Taxes

 

Interest income, net, which is comprised of interest income offset byfees related to the establishment and maintenance of our revolving creditfacility and interest paid on short-term borrowings, was $2.2 million and $0.4million for the first halves of 2005 and 2004, respectively. Higher interestrates and higher cash balances supported the increase in net interest income.While we expect continued benefits from relatively higher interest rates thisyear, we expect the year over year gains in interest income will narrow infuture quarters reflecting the seasonality of our cash flow.

 

Other, net included $0.2 million of foreign exchange gains resultingfrom the timing of settlement of local currency denominated receivables andpayables. These gains were driven by the volatility of exchange rates withinthe first half of 2005, and should not be considered indicative of expectedfuture results.

 

The effective income taxrate was 34.0% in the first half of 2005, compared to 35.5% in the first halfof 2004. We established a Hong Kongprocurement company and international treasury center in Switzerland in thefourth quarter of 2004, which better aligns our organizational structure withour expanding global presence and reduces our estimated taxes on foreignearnings.

 

18

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## **Reconciliation of Totaland International Revenue Increases To Constant Dollar Revenue Increases**

 

Total Company Revenue Reconciliation:

 

| ** **                                     | ** ** | **For the Three Months  Ended July 1, 2005** | ** ** | **For the Six Months  Ended July 1, 2005** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **$ ****Millions  Change**                   | ** ** | **%****Change**                                 | ** ** | **$ ****Millions  Change** | ** ** | **%****Change** | ** ** |
| Revenue  increase (GAAP)                       |       | $                                                 | 10.1       |                                            | 4.4        |   | $ | 42.5 |   | 7.7 |   |
| Increase  due to foreign exchange rate changes |       | 3.7                                               |       | 1.6                                             |       | 11.1 |   | 2.0 |   |
| Revenue  increase in constant dollars          |       | 6.4                                               |       | 2.8                                             |       | 31.4 |   | 5.7 |   |
|                                                |            |                                                   |            |                                                 |            |  |  |  |  |  |  |

 

International Revenue Reconciliation:

 

| ** **                                     | ** ** | **For the Three Months  Ended July 1, 2005** | ** ** | **For the Six Months  Ended July 1, 2005** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **$ ****Millions  Change**                   | ** ** | **%****Change**                                 | ** ** | **$ ****Millions  Change** | ** ** | **%****Change** | ** ** |
| Revenue  increase (GAAP)                       |       | $                                                 | 13.6       |                                            | 14.9       |   | $ | 40.0 |   | 15.2 |   |
| Increase  due to foreign exchange rate changes |       | 3.7                                               |       | 4.1                                             |       | 11.1 |   | 4.3 |   |
| Revenue  increase in constant dollars          |       | 9.9                                               |       | 10.8                                            |       | 28.9 |   | 10.9 |   |
|                                                |            |                                                   |            |                                                 |            |  |  |  |  |  |  |

 

Management providesconstant dollar revenue growth for total Company and International resultsbecause we use the measure to understand revenue growth excluding any impactfrom foreign exchange rate changes.

 

Accounts Receivable andInventory

 

Accounts receivable decreased1.0% to $130.6 million at July 1, 2005, compared with $131.9 millionreported at July 2, 2004. Days sales outstanding decreased three days to 49days reflecting improved collection performance offset by a shift in revenue tolater in the quarter. Wholesale days outstanding decreased two days from 61 to59 days for the second quarters ended July 2, 2004 and July 1, 2005,respectively.

 

Inventory increased 26.6%to $216.5 million at July 1, 2005 from $170.9 million at July 2,2004. In the fourth quarter of 2004, weestablished a Hong Kong procurement company and international treasury centerin Switzerland to better align our organizational structure with our expandingglobal presence and provide enhanced support to our global sourcing operationsand 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 second quarter of 2004, we estimate that inventory and accounts payablebalances would have increased by approximately $32.8 million. Adjusting forthis change, on a comparable basis, inventory rose 6.3%. Had the new sourcingarrangements been in place in the past, we estimate our annual inventory turnswould have been approximately 4.0 times for the second quarter of 2005,compared to 3.9 times for the second quarter of 2004, reflecting continuedimprovement in our inventory control efforts. The earlier transfer of title hasno impact on profit or cash flow.

 

### **Liquidityand Capital Resources**

 

Net cash used byoperations for the first half of 2005 was $37.5 million, compared with $62.4million for the first half of 2004. The reduction in use of cash in the firsthalf of 2005 compared with 2004 was primarily due to an increase in accountspayable, strong collection performance and higher net income offset by anincrease in inventory.

 

Net cash used for investingactivities amounted to $10.0 million in the first half of 2005, compared with $11.8million in the first half of 2004. Capital expenditures in 2005 were $9.5million versus $10.7 million in 2004, primarily driven by Internationalinvestments.

 

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Net cash used forfinancing activities was $66.8 million in the first half of 2005, compared with$3.9 million in the first half of 2004. Cash flows from financing activitiesreflected share repurchases of $80.3 million in the first six months of 2005,compared with $20.1 million in the first six months of 2004. We received cashinflows of $13.5 million in the first half of 2005 from the issuance of commonstock related to the exercise of employee stock options, compared with $16.3million in the first half of 2004.

 

We have an unsecuredcommitted 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 thefinal maturity date to April 30, 2008. The Agreement provides for $200million of committed borrowings, of which up to $125 million may be used forletters of credit. Under certain circumstances, we may increase the committedborrowing limit by $50 million for a total commitment of $250 million. Underthe terms of the Agreement, we may borrow at interest rates based on eurodollarrates (approximately 3.3% at July 1, 2005), plus an applicable marginbased on a fixed-charge coverage grid of between 50 and 100 basis points thatis adjusted quarterly. At July 1, 2005, the applicable margin under thefacility was 60 basis points. We will pay a commitment fee of 12.5 to 25 basispoints per annum on the total commitment, based on a fixed-charge coverage gridthat is adjusted quarterly. At July 1, 2005, the commitment fee was 15basis points. The Agreement places certain limitations on additional debt,stock repurchases, acquisitions, amount of dividends we may pay, and certainother financial and non-financial covenants. The primary financial covenantsrelate to maintaining a minimum fixed charge coverage of 3:1, a leverage ratioof 1.5:1 and under certain conditions, a minimum level of earnings beforeincome tax, depreciation and amortization. We measure compliance with thefinancial and non-financial covenants and ratios as required by the terms ofthe Agreement on a fiscal quarter basis.

 

We had uncommitted linesof credit available from certain banks totaling $50 million at July 1,2005. Any borrowings under these lines would be at prevailing money marketrates (approximately 3.8% at July 1, 2005). Further, we had an uncommittedletter of credit facility of $75 million to support inventory purchases. Thesearrangements may be terminated at any time at the option of the banks or theCompany.

 

Management believes thatour capital needs for 2005 will be met through our current cash balances, ourexisting credit facilities and cash from operations, without the need foradditional permanent financing. However, as discussed in the exhibit to ourAnnual Report on Form 10-K entitled “Cautionary Statements for Purposes ofthe Safe Harbor Provisions of the Private Securities Litigation Reform Act of1995” and in “Forward-looking Information” below, several risks anduncertainties could cause the Company to need to raise additional capitalthrough equity and/or debt financing. From time to time the Company considersacquisition opportunities which, if pursued, could also result in the need foradditional financing. The availability and terms of any such financing would besubject to prevailing market conditions and other factors at that time.

 

Off Balance SheetArrangements

 

As of July 1, 2005 and July 2, 2004, we had letters of creditoutstanding of $32.4 million and $32.8 million, respectively. These letters ofcredit were issued predominantly for the purchase of inventory. As of July 1,2005, the Company had $221.0 million in hedging contracts outstanding, all ofwhich are due to settle within the next 10 months (see Note 7).

 

We have the following offbalance sheet arrangements:

(Dollars in Millions)

 

| **July 1,  2005** | ** ** | **Total Amounts  Committed** | ** ** |
|------------------------|------------|------------------------------|------------|
| Lines  of credit       |       | $                            | —     |   |
|                   |       |                         |       |
| Letters  of credit     |       | 32.4                         |       |
|                   |       |                         |       |
| Hedging  contracts     |       | 221.0                        |       |
|                   |       |                         |       |
| Total                  |       | $                            | 253.4      |   |

 

We use funds from operations and unsecured committed and uncommittedlines of credit as the primary sources of financing for our seasonal and otherworking capital requirements. Long-term debt, if required, is generally used tofinance long-term investments. Our principal risks to these sources offinancing are the impact on our financial condition from economic

 

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downturns, a decrease in the demand for our products, increases in theprices of materials and a variety of other factors. We anticipate that capitalrequirements for 2005 will be met through the use of our current cash balances,through our existing credit facility (which places certain limitations onadditional debt, stock repurchases, acquisitions and on the amount of dividendswe may pay, and also contains certain other financial and operating covenants)and through cash flow from operations, without the need for additionalpermanent financing. However, if the need arises, our ability to obtain anyadditional credit facilities will depend upon prevailing market conditions, ourfinancial condition and the terms and conditions of such additional facilities.

 

New AccountingPronouncements

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123R, *“Share-Based Payment.”*This statement is a revision of SFAS No. 123 and supersedes APB Opinion No. 25and its related implementation guidance. SFAS No. 123R focuses primarilyon accounting for transactions in which an entity obtains employee services inexchange for share-based payment transactions. The Statement requires entitiesto recognize stock compensation expense for awards of equity instruments toemployees based on the grant-date fair value of those awards (with limitedexceptions). In April 2005, the Securities and Exchange Commissionannounced the adoption of a new rule that amends the compliance dates forSFAS No. 123R. The Commission’s new rule allows implementation ofSFAS No. 123R at the beginning of a company’s next fiscal year instead ofthe first interim or annual reporting period that begins after June 15,2005. We will adopt the statement on January 1, 2006. Our adoption of SFASNo. 123R will increase stock-based compensation expense and decrease netincome. In addition, SFAS No. 123R requires that the excess tax benefitsrelated to stock-based compensation be reported as a cash inflow from financingactivities rather than a reduction of taxes paid in cash from operations.

 

In May 2005, the FASB issued SFAS No. 154, “*AccountingChanges and Error Corrections–A Replacement of APB Opinion No. 20 and FASBStatement No. 3*.”  SFAS No.154 applies to all voluntary changes in accounting principle and requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable.  SFAS No. 154 requires that a change indepreciation, amortization or depletion method for long-lived, nonfinancialassets be accounted for as a change of estimate affected by a change inaccounting principle.  SFAS No. 154 alsocarries forward without change the guidance in APB Opinion No. 20 with respectto accounting for changes in accounting estimates, changes in the reportingunit and correction of an error in previously issued financial statements.  The Company is required to adopt SFAS No. 154for accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.  The adoption ofSFAS No. 154 is not expected to have a material effect on the Company’sconsolidated financial position or results of operations.

 

In June 2005, the FASB’s Emerging Issues Task Force reached a consensuson Issue No. 05-6, “*Determining the AmortizationPeriod for Leasehold Improvements*”** (“EITF 05-6”). The guidance requires that leasehold improvements acquired in a businesscombination or purchased subsequent to the inception of a lease be amortizedover the lesser of the useful life of the assets or a term that includesrenewals that are reasonably assured at the date of the business combination orpurchase.  The guidance is effective forperiods beginning after June 29, 2005. The adoption of EITF 05-6 is not expectedto have a material effect on the Company’s consolidated financial position orresults of operations.

 

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**Forward-looking Information**

 

As discussed in Exhibit 99.1entitled “Cautionary Statements for Purposes of the Safe Harbor Provisions ofthe Private Securities Litigation Reform Act of 1995,” of our Annual Report on Form 10-Kfor the year ended December 31, 2004, investors should be aware of certainrisks, uncertainties and assumptions that could affect our actual results andcould 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 risks,uncertainties and assumptions. These risks, uncertainties and assumptionsinclude, but are not limited to:

 

•                  Ourability to successfully market and sell our products in a highly competitiveindustry and in view of changing consumer trends, consumer acceptance ofproducts, and other factors affecting retail market conditions, including thecurrent U.S. economic environment and the global economic and political uncertaintiesresulting from the continuing war on terrorism;

•                  Ourability to locate and retain independent manufacturers to produce lower cost,high-quality products with rapid turnaround times;

•                  Ourability to manage our foreign exchange rate risks;

•                  Ourreliance on a limited number of key suppliers;

•                  Ourability to obtain adequate materials at competitive prices;

•                  Ourability to successfully invest in our infrastructure and product based uponadvance sales forecasts;

•                  Ourability to recover our investment in, and expenditures of, our retailorganization through adequate sales at such retail locations;

•                  Ourability to respond to actions of our competitors, some of whom havesubstantially greater resources than ours;

•                  Ourability to manage the impact of import and export duties including anti-dumpingduties that could be imposed by the European Union.

 

We undertake noobligation to update publicly any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

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**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

In the normal course ofbusiness, our financial position and results of operations are routinelysubject to a variety of risks, including market risk associated with interestrate movements on borrowings and investments and currency rate movements onnon-U.S. dollar denominated assets, liabilities and income. We regularly assessthese risks and have established policies and business practices that shouldresult in an appropriate level of protection against the adverse effect ofthese and other potential exposures.

 

We utilize cash fromoperations and U.S. dollar denominated borrowings to fund our working capitaland investment needs. Short-term debt, if required, is used to meet workingcapital requirements and long-term debt, if required, is generally used tofinance long-term investments. In addition, we use derivative instruments inour hedging of foreign currency transactions. These debt instruments andderivative instruments are viewed as risk management tools and are not used fortrading or speculative purposes. Cash balances are invested in high-gradesecurities with terms less than 3 months.

 

We have availableunsecured committed and uncommitted lines of credit as sources of financing forour working capital requirements. Borrowings under these credit agreements bearinterest at variable rates based on either lenders’ cost of funds, plus anapplicable spread, or prevailing money market rates. At July 1, 2005 and July 2,2004, we had no short-term or long-term debt outstanding.

 

Our foreign currencyexposure is generated primarily from our European operating subsidiaries and,to a lesser degree, our Asian and Canadian operating subsidiaries. We seek tominimize the impact of these foreign currency fluctuations by hedging therelated transactions with foreign currency forward contracts. Currently, theseforeign currency forward contracts will expire in 10 months or less. Based uponsensitivity analysis as of July 1, 2005, a 10% change in foreign exchangerates would cause the fair value of our financial instruments toincrease/decrease by approximately $13.3 million, compared with $17.4 millionat July 2, 2004.

 

**Item 4. CONTROLS AND PROCEDURES**

 

We maintain a system ofdisclosure controls and procedures which are designed to ensure thatinformation required to be disclosed by us in reports we file or submit underthe Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. These disclosurecontrols and procedures include controls and procedures designed to ensure thatinformation required to be disclosed under the federal securities laws isaccumulated and communicated to our management on a timely basis to allowdecisions regarding required disclosure.

 

Based on their evaluationas of July 1, 2005, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and procedures,as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct were effective.

 

There were no changes inour internal control over financial reporting, as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act, that occurred during the quarter ended July 1,2005, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**Part II OTHER INFORMATION**

 

**Item2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

**ISSUER PURCHASES OF EQUITY SECURITIES(1)**

 

**For theThree Fiscal Months Ended July 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** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|
|                              |       |                                      |       |                              |       |                                                                                      |          |                                                                                         |       |
| April 2 – April 29 |       | 342,942                                   |       | $                                 | 36.23      |                                                                                      | 342,942       |                                                                                         | 3,252,162  |   |
| April 30 – May 27  |       | 348,291                                   |       | 35.88                             |       | 348,291                                                                                   |          | 2,903,871                                                                                    |       |
| May 28 – July 1    |       | 320,806                                   |       | 38.32                             |       | 320,806                                                                                   |          | 2,583,065                                                                                    |       |
| **Q2 Total**                      | ** ** | **1,012,039**                             | ** ** | **$**                             | **36.77**  | ** **                                                                                | **1,012,039** | ** **                                                                                   | ** ** | ** ** |

 

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**Footnote(1)**

 
| ** ** | ** ** | **Announcement  Date** | ** ** | **Approved  Program  Size (Shares)** | ** ** | **Expiration  Date** | ** ** |
|------------|------------|------------------------|------------|--------------------------------------|------------|----------------------|------------|
|       |       |                   |       |                                 |       |                 |       |
| Program 1  |       | 10/16/2003             |       | 8,000,000                            |       | None                 |       |

 

Noexisting programs expired or were terminated during the reporting period. SeeNote 13 to our unaudited consolidated financial statements in this Form 10-Qfor additional information.

 

Shareand price per share information is adjusted to reflect the Company’s 2-for-1stock split. The Board approved a 100% increase in shares remaining under itspreviously announced repurchase program as of the April 14, 2005 recorddate to reflect the impact of the stock split. The increase was effectiveimmediately after the May 2, 2005 distribution date.

 

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** Fiscalmonth*

***  Based on trade date - not settlement date*

 

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**Item 4.  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

(a)               We held our Annual Meeting of Stockholders onMay 19, 2005 (the “Annual Meeting”).

 

(b)              At the Annual Meeting, proxies were solicitedpursuant to Regulation 14A of the Securities Exchange Act of 1934 and allnominees for director were elected asindicated by the following schedule of votes cast for each director. Theholders of Class A CommonStock elected the following directors:

 

| **Nominee**          | ** ** | **Total Votes for  Each Director** | ** ** | **Total Votes Withheld from  Each Director** | ** ** |
|----------------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| Ian  W. Diery        |       | 23,494,699                         |       | 1,666,501                                    |       |
| Irene  M. Esteves    |       | 22,457,994                         |       | 2,703,206                                    |       |
| John  A. Fitzsimmons |       | 23,494,463                         |       | 1,666,501                                    |       |

 

 

Theholders of Class A Common Stock and the holders of Class B CommonStock voting together as a single class elected the following directors:

 

| **Nominee**                 | ** ** | **Total Votes for  Each Director** | ** ** | **Total Votes Withheld from  Each Director** | ** ** |
|-----------------------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| Sidney  W. Swartz           |       | 82,260,328                         |       | 1,619,172                                    |       |
| Jeffrey  B. Swartz          |       | 82,630,774                         |       | 1,248,726                                    |       |
| Virginia  H. Kent           |       | 82,642,490                         |       | 1,237,010                                    |       |
| Kenneth  T. Lombard         |       | 82,641,765                         |       | 1,237,735                                    |       |
| Edward  W. Moneypenny       |       | 82,641,343                         |       | 1,238,157                                    |       |
| Peter  R. Moore             |       | 82,641,515                         |       | 1,237,985                                    |       |
| Bill  Shore                 |       | 82,249,934                         |       | 1,629,566                                    |       |
| Terdema  L. Ussery, II |       | 82,640,755                         |       | 1,238,745                                    |       |

 

Therewere no abstentions or broker non-votes with respect to the election of thedirector nominees.

 

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**Item6.  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 – ChiefExecutive Officer Certification Pursuant to Section 1350, Chapter 63 ofTitle 18, United States Code, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, furnished herewith.

 

Exhibit 32.2 – ChiefFinancial Officer Certification Pursuant to Section 1350, Chapter 63 ofTitle 18, United States Code, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, furnished herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                        | THE TIMBERLAND COMPANY |
|-----------------------------|------------------------|
|                        | (Registrant)           |
|                        |                   |
| Date:  August 10, 2005 | By:                    | /S/ BRIAN P. MCKEON |   |
|                        |                   | Brian P. McKeon |
| * *                    | * *               | *Executive Vice  President-Finance and Administration, Chief  Financial Officer* |
| * *                    | * *               | * * |
| Date: August 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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