UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

X		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

__		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9548

The Timberland Company

 

(Exact name of registrant as specified in its charter)

Delaware		02-0312554
(State or other jurisdiction of		(I.R.S. Employer Identification 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 mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x		Accelerated Filer o
Non-Accelerated Filer o   (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     x No

On October 29, 2010, 39,898,956 shares of the registrant’s Class A Common Stock were outstanding and 10,889,160 shares of the registrant’s Class B Common Stock were outstanding.

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THE TIMBERLAND COMPANY

FORM 10-Q

TABLE OF CONTENTS

		Page(s)
Part I Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets - October 1, 2010, December 31, 2009 and October 2, 2009			5
Unaudited Condensed Consolidated Statements of Operations - For the Quarters and Nine Months Ended October 1, 2010 and October 2, 2009			6
Unaudited Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended October 1, 2010 and October 2, 2009			7
Notes to Unaudited Condensed Consolidated Financial Statements			8-22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23-34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			34
Part II Other Information
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 6. Exhibits			36
Signatures			37
Exhibit Index			38
Exhibits			39-42
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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Page 3

Cautionary Note Regarding Forward-Looking Statements

The Timberland Company (the “Company”) wishes to take advantage of The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, which provide a “safe harbor” for certain written and oral forward-looking statements to encourage companies to provide prospective information. Prospective information is based on management’s then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions used in making such expectations or forecasts, may become inaccurate. The discussion in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”) and Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q identifies important factors that could affect the Company’s actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company. The risks included in Part I, Item 1A, Risk Factors, of the Form 10-K and Part II, Item 1A of this Quarterly Report are not exhaustive. Other sections of the Form 10-K as well as this Quarterly Report may include additional factors which could adversely affect the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking Information

As discussed above and in Part I, Item 1A, Risk Factors, of the Form 10-K and Part II, Item 1A of this Quarterly Report, investors should be aware of certain risks, uncertainties and assumptions that could affect our actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of us. Statements containing the words “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue,” “target” and variations thereof, and other statements contained in this Quarterly Report regarding matters that are not historical facts are forward-looking statements. Such statements are based on current expectations only and actual future results may differ materially from those expressed or implied by such forward-looking statements due to certain risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, but are not limited to:

  •   Our ability to successfully market and sell our products in a highly competitive industry and in view of changing consumer trends and preferences, consumer acceptance of products, and other factors affecting retail market conditions, including the current global economic environment and global political uncertainties resulting from the continuing war on terrorism;

  •   Our ability to execute key strategic initiatives;

  •   Our ability to adapt to potential changes in duty structures in countries of import and export, including anti-dumping measures imposed by the European Union with respect to leather footwear imported from China and Vietnam;

  •   Our ability to manage our foreign exchange rate risks, and taxes, duties, import restrictions and other risks related to doing business internationally;

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

  •   Our reliance on a limited number of key suppliers and a global supply chain;

  •   Our ability to obtain adequate materials at competitive prices;

  •   Our reliance on the financial health of, and the appeal of our products to, our customers;

  •   Our reliance on the financial stability of third parties with which we do business, including customers, suppliers and distributors;

  •   Our ability to successfully invest in our infrastructure and products based upon advance sales forecasts;

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

  •   Our ability to respond to actions of our competitors, some of whom have substantially greater resources than we have.

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

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Page 5

PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

		October 1,				December 31,				October 2,
		2010				2009				2009
Assets
Current assets
Cash and equivalents			$108,815				$289,839				$112,851
Accounts receivable, net of allowance for doubtful accounts of $13,692 at October 1, 2010, $12,175 at December 31, 2009 and $13,578 at October 2, 2009			268,985				149,178				270,272
Inventory, net			239,805				158,541				201,733
Prepaid expense			30,917				32,863				32,919
Prepaid income taxes			27,822				11,793				18,287
Deferred income taxes			27,551				26,769				23,512
Derivative assets			120				1,354				839
Total current assets			704,015				670,337				660,413
Property, plant and equipment, net			64,985				69,820				70,664
Deferred income taxes			17,070				14,903				13,825
Goodwill			38,958				44,353				44,353
Intangible assets, net			35,883				45,532				45,948
Other assets, net			13,546				14,962				15,161
Total assets			$874,457				$859,907				$850,364
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable			$101,874				$79,911				$ 89,681
Accrued expense
Payroll and related			36,125				43,512				30,478
Other			94,076				81,988				88,256
Income taxes payable			29,683				21,959				18,224
Deferred income taxes			-				48				-
Derivative liabilities			4,308				389				3,994
Total current liabilities			266,066				227,807				230,633
Other long-term liabilities			34,680				36,483				36,146
Commitments and contingencies
Stockholders’ equity
Preferred Stock, $.01 par value; 2,000,000 shares authorized; none issued			-				-				-
Class A Common Stock, $.01 par value (1 vote per share); 120,000,000 shares authorized; 75,100,342 shares issued at October 1, 2010, 74,570,388 shares issued at December 31, 2009 and 74,265,471 shares issued at October 2, 2009			751				746				743
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; 10,889,160 shares issued and outstanding at October 1, 2010, 11,089,160 shares issued and outstanding at December 31, 2009 and 11,339,160 shares issued and outstanding at October 2, 2009			109				111				113
Additional paid-in capital			275,049				266,457				264,484
Retained earnings			1,029,173				974,683				952,429
Accumulated other comprehensive income			6,002				15,048				12,195
Treasury Stock at cost; 35,206,038 Class A shares at October 1, 2010, 31,131,253 Class A shares at December 31, 2009 and 30,257,800 Class A shares at October 2, 2009			(737,373	)			(661,428	)			(646,379	)
Total stockholders’ equity			573,711				595,617				583,585
Total liabilities and stockholders’ equity			$874,457				$859,907				$850,364

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)

		For the Quarter Ended								For the Nine Months Ended
		October 1,				October 2,				October 1,				October 2,
		2010				2009				2010				2009
Revenue			$432,344				$421,766				$938,340				$898,116
Cost of goods sold			225,775				227,254				480,280				491,407
Gross profit			206,569				194,512				458,060				406,709
Operating expense
Selling			106,637				107,314				285,457				284,609
General and administrative			33,397				28,805				89,738				81,118
Impairment of goodwill			-				-				5,395				-
Impairment of intangible assets			-				-				7,854				925
Gain on termination of licensing agreements			-				-				(3,000	)			-
Restructuring			-				(88	)			-				(209	)
Total operating expense			140,034				136,031				385,444				366,443
Operating income			66,535				58,481				72,616				40,266
Other income/(expense), net
Interest income			84				106				305				845
Interest expense			(133	)			(117	)			(414	)			(355	)
Other, net			5,603				2,626				5,739				3,629
Total other income/(expense), net			5,554				2,615				5,630				4,119
Income before income taxes			72,089				61,096				78,246				44,385
Income tax provision			19,894				23,339				23,756				9,995
Net income			$52,195				$37,757				$54,490				$34,390
Earnings per share
Basic			$    1.01				$     .68				$    1.03				$     .61
Diluted			$    1.00				$     .68				$    1.02				$     .61
Weighted-average shares outstanding
Basic			51,892				55,744				53,098				56,385
Diluted			52,225				55,908				53,531				56,692

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Page 7

THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

		For the Nine Months Ended
		October 1, 2010				October 2, 2009
Cash flows from operating activities:
Net income			$54,490				$34,390
Adjustments to reconcile net income to net cash used by operating activities:
Deferred income taxes			(2,819	)			5,041
Share-based compensation			5,913				4,163
Depreciation and amortization			19,179				21,582
Provision for losses on accounts receivable			3,392				4,180
Impairment of goodwill			5,395				-
Impairment of intangible assets			7,854				925
Tax expense from share-based compensation, net of excess benefit			(520	)			(1,804	)
Unrealized loss on derivatives			1,008				554
Other non-cash (credits)/charges, net			(55	)			930
Increase/(decrease) in cash from changes in operating assets and liabilities, net of the effect of business combinations:
Accounts receivable			(123,993	)			(103,264	)
Inventory			(80,146	)			(18,891	)
Prepaid expense and other assets			3,205				1,265
Accounts payable			21,872				(8,099	)
Accrued expense			1,994				5,263
Prepaid income taxes			(16,028	)			(1,600	)
Income taxes payable			5,573				(7,208	)
Other liabilities			(221	)			(175	)
Net cash used by operating activities			(93,907	)			(62,748	)
Cash flows from investing activities:
Acquisition of business, net of cash acquired			-				(1,554	)
Additions to property, plant and equipment			(11,318	)			(11,078	)
Other			(209	)			(601	)
Net cash used by investing activities			(11,527	)			(13,233	)
Cash flows from financing activities:
Common stock repurchases			(73,734	)			(29,285	)
Issuance of common stock			2,621				1,373
Excess tax benefit from share-based compensation			609				136
Other			(909	)			(1,248	)
Net cash used by financing activities			(71,413	)			(29,024	)
Effect of exchange rate changes on cash and equivalents			(4,177	)			667
Net decrease in cash and equivalents			(181,024	)			(104,338	)
Cash and equivalents at beginning of period			289,839				217,189
Cash and equivalents at end of period			$108,815				$112,851
Supplemental disclosures of cash flow information:
Interest paid			$368				$309
Income taxes paid			$37,017				$15,460
Non-cash investing activity (purchase of software licenses on account)			$1,500				$    -

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THE TIMBERLAND COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of The Timberland Company and its subsidiaries (“we”, “our”, “us”, “its”, “Timberland” or the “Company”). These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

The financial statements included in this Quarterly Report on Form 10-Q are unaudited, but in the opinion of management, such financial statements include the adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and changes in cash flows for the interim periods presented. The results reported in these financial statements are not necessarily indicative of the results that may be expected for the full year due, in part, to seasonal factors. Historically, our revenue has been more heavily weighted to the second half of the year.

The Company’s fiscal quarters end on the Friday closest to the day on which the calendar quarter ends, except that the fourth quarter and fiscal year end on December 31. The third quarters and first nine months of our fiscal year in 2010 and 2009 ended on October 1, 2010 and October 2, 2009, respectively.

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06 (“ASU No. 2010-06”), Improving Disclosures About Fair Value Measurements. This accounting standard update adds new requirements for fair value measurement disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and inputs and valuation techniques used to measure fair value. ASU No. 2010-06 was effective for the Company beginning January 1, 2010 and its adoption did not have a material impact on the Company’s existing disclosures.

Note 2. Fair Value Measurements

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that ranks the quality and reliability of the information used to determine fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The Company recognizes and reports significant transfers between Level 1 and Level 2, and into and out of Level 3, as of the actual date of the event or change in circumstances that caused the transfer.

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Financial Assets and Liabilities

The following tables present information about our assets and liabilities measured at fair value on a recurring basis as of October 1, 2010 and December 31, 2009:

Description
		Level 1				Level 2				Level 3				Impact of Netting				October 1, 2010
Assets:
Cash equivalents:
Time deposits		$	-			$	-			$	-			$	-			$	-
Mutual funds		$	-			$	5,103			$	-			$	-			$	5,103
Foreign exchange forward contracts:
Derivative assets		$	-			$	926			$	-			$	(806	)		$	120
Cash surrender value of life insurance		$	-			$	7,444			$	-			$	-			$	7,444
Liabilities:
Foreign exchange forward contracts:
Derivative liabilities		$	-			$	6,294			$	-			$	(806	)		$	5,488
Description
		Level 1				Level 2				Level 3				Impact of Netting				December 31, 2009
Assets:
Cash equivalents:
Time deposits		$	-			$	70,041			$	-			$	-			$	70,041
Mutual funds		$	-			$	95,871			$	-			$	-			$	95,871
Foreign exchange forward contracts:
Derivative assets		$	-			$	1,768			$	-			$	(230	)		$	1,538
Cash surrender value of life insurance		$	-			$	8,036			$	-			$	-			$	8,036
Liabilities:
Foreign exchange forward contracts:
Derivative liabilities		$	-			$	621			$	-			$	(230	)		$	391

Cash equivalents, included in cash and equivalents on our unaudited condensed consolidated balance sheets, include money market mutual funds and time deposits placed with a variety of high credit quality financial institutions. Time deposits are valued based on current interest rates and mutual funds are valued at the net asset value of the fund. The carrying values of accounts receivable and accounts payable approximate their fair values due to their short-term maturities.

The fair value of the derivative contracts in the table above is reported on a gross basis by level based on the fair value hierarchy with a corresponding adjustment for netting for financial statement presentation purposes, where appropriate. The Company often enters into derivative contracts with a single counterparty and certain of these contracts are covered under a master netting agreement. The fair values of our foreign currency forward contracts are based on quoted market prices or pricing models using current market rates. As of October 1, 2010, the derivative contracts above include $1,179 of liabilities included in other long-term liabilities on our unaudited condensed consolidated balance sheet. As of December 31, 2009, the derivative contracts above include $184 of assets and $2 of liabilities included in other assets, net and other long-term liabilities, respectively, on our unaudited condensed consolidated balance sheet.

The cash surrender value of life insurance represents insurance contracts held as assets in a rabbi trust to fund the Company’s deferred compensation plan. These assets are included in other assets, net on our unaudited condensed consolidated balance sheet. The cash surrender value of life insurance is based on the net asset values of the underlying funds available to plan participants.

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Nonfinancial Assets

Goodwill and indefinite-lived intangible assets are tested for impairment annually at the end of our second quarter and when events occur or circumstances change that would, more likely than not, reduce the fair value of a business unit or an intangible asset with an indefinite-life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investment in the business unit or an expectation that the carrying amount may not be recoverable, among other factors.

During the quarter ended July 2, 2010, management concluded that the carrying value of goodwill exceeded the estimated fair value for its IPath, North America Retail and Europe Retail reporting units and, accordingly, recorded an impairment charge of $5,395. Management also concluded that the carrying value of the IPath and howies trademarks and other intangible assets exceeded their estimated fair value and, accordingly, recorded an impairment charge of $7,854. The Company’s North America Wholesale and Europe Wholesale business units have fair values substantially in excess of their carrying value. See Note 9 to the unaudited condensed consolidated financial statements.

Impairment charges included in the second quarter of 2010 unaudited condensed consolidated statement of operations, by segment, are as follows:

		North America								Sub-				Europe												Sub-				Total
		IPath				Retail				Total				IPath				howies				Retail				Total				Company
Goodwill			$4,118				$794				$4,912				$        -				$        -				$483				$483				$5,395
Trademarks			2,032				-				2,032				1,169				3,181				-				4,350				6,382
Other intangibles			1,228				-				1,228				-				244				-				244				1,472
			$7,378				$794				$8,172				$1,169				$3,425				$483				$5,077				$13,249

These non-recurring fair value measurements were developed using significant unobservable inputs (Level 3). For goodwill, the primary valuation technique used was the discounted cash flow analysis based on management’s estimates of forecasted cash flows for each business unit, with those cash flows discounted to present value using rates proportionate with the risks of those cash flows. In addition, management used a market-based valuation method involving analysis of market multiples of revenues and earnings before interest, taxes, depreciation and amortization for a group of similar publicly traded companies and, if applicable, recent transactions involving comparable companies. The Company believes the blended use of these models balances the inherent risk associated with either model if used on a stand-alone basis, and this combination is indicative of the factors a market participant would consider when performing a similar valuation. For trademark intangible assets, management used the relief-from-royalty method in which fair value is the discounted value of forecasted royalty revenue arising from a trademark using a royalty rate that an independent third party would pay for use of that trademark. Further information regarding the fair value measurements is provided below.

IPath
The IPath business unit has not met the revenue and earnings growth forecasted at its acquisition in April 2007. Accordingly, during the second quarter of 2010, management reassessed the financial expectations of this business as part of its long-range planning process. The revenue and earnings growth assumptions were developed based on near term trends, potential opportunities and planned investment in the IPath^® brand. Management’s business plans and projections were used to develop the expected cash flows for the next five years and a 4% residual revenue growth rate applied thereafter. The analysis reflects a market royalty rate of 1.5% and a weighted average discount rate of 22%, derived primarily from published sources and adjusted for increased market risk. After the charges in the table above, there was $720 of finite-lived trademark intangible assets remaining at July 2, 2010. The carrying value of Ipath’s goodwill was reduced to zero.

howies
howies has not met the revenue and earnings growth forecasted at its acquisition in December 2006. Accordingly, during the second quarter of 2010, management reassessed the financial expectations of this business as part of its long-range planning process. The revenue and earnings growth assumptions were developed based on near term trends, potential opportunities and planned investment in the howies^® brand. Management’s business plans and projections were used to develop the expected cash flows for the next five years and a 4% residual revenue growth rate applied thereafter. The analysis reflects a market royalty rate of 2% and a weighted average discount rate of 24%, derived primarily from published sources and adjusted for increased market risk. After the charges in the table above, there was $1,200 of indefinite-lived trademark intangible assets remaining at July 2, 2010.

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North America and Europe Retail
The Company’s retail businesses in North America and Europe have been negatively impacted by continued weakness in the macroeconomic environment, low consumer spending and a longer than expected economic recovery. The fair value of these businesses using the discounted cash flow analysis were based on management’s business plans and projections for the next five years and a 4% residual growth thereafter. The analysis reflects a weighted average discount rate in the range of 19%, derived primarily from published sources and adjusted for increased market risk. After the charges in the table above, the carrying value of the goodwill was zero at July 2, 2010.

On an ongoing basis, the Company evaluated the carrying value of the GoLite trademark, which is licensed to a third party, for events or changes in circumstances indicating the carrying value of the asset may not be recoverable. Factors considered include the ability of the licensee to obtain necessary financing, the impact of changes in economic conditions and an assessment of the Company’s ability to recover all contractual payments when due under the licensing arrangement. During the first quarter of 2009, using Level 3 input factors noted above, the Company determined that the carrying value of the GoLite trademark was impaired and recorded a pre-tax, non-cash charge of approximately $925, which reduced the carrying value of the trademark to zero at April 3, 2009. The charge is reflected in our Europe segment.

During the third quarter of 2010 and 2009, the Company evaluated the carrying value of certain long-lived fixed assets, specifically certain footwear molds used in our production process. Based on an evaluation that included Level 3 input factors such as actual and planned production levels and style changes, the Company determined that the carrying value of the molds was impaired and we recorded a pre-tax, non-cash charge of approximately $485 and $740 in the quarters ended October 1, 2010 and October 2, 2009, respectively, which reduced the carrying value of the molds to zero. The charge, included in cost of sales in our statement of operations, is reflected in Unallocated Corporate in our segment reporting.

Note 3. Derivatives

In the normal course of business, the financial position and results of operations of the Company are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as we purchase and sell goods in local currencies. We have established policies and business practices that are intended to mitigate a portion of the effect of these exposures. We use derivative financial instruments, specifically forward contracts, to manage our currency exposures. These derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are either designated as cash flow hedges of forecasted foreign currency transactions or are undesignated economic hedges of existing intercompany assets and liabilities, certain third party assets and liabilities, and non-US dollar-denominated cash balances.

Derivative instruments expose us to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. We do not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a group of major financial institutions and have varying maturities through January 2012. As a matter of policy, we enter into these contracts only with counterparties having a minimum investment-grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.

Cash Flow Hedges

The Company principally uses foreign currency forward contracts as cash flow hedges to offset a portion of the effects of exchange rate fluctuations on certain of its forecasted foreign currency denominated sales transactions. The Company’s cash flow exposures include anticipated foreign currency transactions, such as foreign currency denominated sales, costs, expenses and inter-company charges, as well as collections and payments. The risk in these exposures is the potential for losses associated with the remeasurement of non-functional currency cash flows into the functional currency. The Company has a hedging program to aid in mitigating its foreign currency exposures and to decrease the volatility in earnings. Under this hedging program, the Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures and recognizes any hedge ineffectiveness in earnings. A hedge is effective if the changes in the fair value of the derivative provide offset of at least 80 percent and not more than 125 percent of the changes in the fair value or cash flows of the hedged item attributable to the risk being hedged. The Company uses regression analysis to assess the effectiveness of a hedge relationship.

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Page 12

Forward contracts designated as cash flow hedging instruments are recorded in our unaudited condensed consolidated balance sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive income (“OCI”) and reclassified to earnings, in cost of goods sold, in the period that the hedged transaction is recognized in earnings. Cash flows associated with these contracts are classified as operating cash flows in the unaudited condensed consolidated statements of cash flows. Hedge ineffectiveness is evaluated using the hypothetical derivative method, and the ineffective portion of the hedge is reported in our unaudited condensed consolidated statements of operations in other, net. The amount of hedge ineffectiveness reported in other, net for the quarters and nine months ended October 1, 2010 and October 2, 2009 was not material.

The notional value of foreign currency forward sell contracts entered into as cash flow hedges is as follows:

		Notional Amount
		December 31,
Currency		October 1, 2010				2009				October 2, 2009
Pound Sterling		$	23,685			$	20,657			$	20,746
Euro			69,283				64,398				64,986
Japanese Yen			22,856				16,083				23,312
Total		$	115,824			$	101,138			$	109,044
Latest Maturity Date		January 2012				January 2011				January 2011

Other Derivative Contracts

We also enter into derivative contracts to manage foreign currency exchange risk on intercompany accounts receivable and payable, third-party accounts receivable and payable, and non-U.S. dollar-denominated cash balances using forward contracts. These forward contracts, which are undesignated hedges of economic risk, are recorded at fair value on the unaudited condensed consolidated balance sheets, with changes in the fair value of these instruments recognized in earnings immediately. The gains or losses related to the contracts largely offset the remeasurement of those assets and liabilities. Cash flows associated with these contracts are classified as operating cash flows in the unaudited condensed consolidated statements of cash flows.

The notional value of foreign currency forward (buy) and sell contracts entered into to mitigate the foreign currency risk associated with certain balance sheet items is as follows (the contract amount represents the net amount of all purchase and sale contracts of a foreign currency):

		Notional Amount
Currency		October 1, 2010				December 31, 2009				October 2, 2009
Pound Sterling		$	15,814				$(12,922)				$(15,901)
Euro			37,024				14,122				25,577
Japanese Yen			18,641				8,013				14,493
Canadian Dollar			7,404				8,204				10,403
Norwegian Kroner			7,651				2,335				5,145
Swedish Krona			5,193				1,969				3,694
Total		$	91,727				$21,721				$43,411
Sell Contracts		$	91,727				$44,293				$59,312
Buy Contracts			-				(22,572)				(15,901)
Total Contracts		$	91,727				$21,721				$43,411
Latest Maturity Date		January 2011				April 2010				January 2010

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Fair Value of Derivative Instruments
The following table summarizes the fair values and presentation in the unaudited condensed consolidated balance sheets for derivative instruments, which consist of foreign exchange forward contracts, as of October 1, 2010, December 31, 2009 and October 2, 2009:

		Asset Derivatives												Liability Derivatives
		Fair Value												Fair Value
		October 1,				December 31,				October 2,				October 1,				December 31,				October 2,
Balance Sheet Location		2010				2009				2009				2010				2009				2009
Derivatives designated as hedge instruments:
Derivative assets		$	255			$	1,313			$	831			$	135			$	224			$	-
Derivative liabilities			635				6				154				4,446				335				3,998
Other assets, net			-				184				127				-				-				18
Other long-term liabilities			21				-				6				1,200				2				236
		$	911			$	1,503			$	1,118			$	5,781			$	561			$	4,252
Derivatives not designated as hedge instruments:
Derivative assets		$	-			$	265			$	8			$	-			$	-			$	-
Derivative liabilities			15				-				-				513				60				150
		$	15			$	265			$	8			$	513			$	60			$	150
Total derivatives		$	926			$	1,768			$	1,126			$	6,294			$	621			$	4,402

The Effect of Derivative Instruments on the Statements of Operations for the Quarters Ended October 1, 2010 and October 2, 2009

														Amount of
														Gain/(Loss)
		Amount of Gain/(Loss)								Location of Gain/(Loss)				Reclassified from
		Recognized in OCI on								Reclassified from				Accumulated OCI into
Derivatives in		Derivatives, Net of Taxes								Accumulated OCI into				Income
Cash Flow		(Effective Portion)								Income				(Effective Portion)
Hedging Relationships		2010				2009				(Effective Portion)				2010				2009
Foreign exchange forward contracts		$	(4,604	)		$	(2,939	)		Cost of goods sold				$	2,947			$	(3,794	)

The Company expects to reclassify pre-tax losses of $4,242 to the statement of operations within the next twelve months.

						Amount of Gain/(Loss)
						Recognized in
Derivatives not Designated		Location of Gain/(Loss) Recognized				Income on Derivatives
as Hedging Instruments		In Income on Derivatives				2010				2009
Foreign exchange forward contracts		Other, net				$	(1,691	)		$	(1,651	)

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Page 14

The Effect of Derivative Instruments on the Statements of Operations for the Nine Months Ended October 1, 2010 and October 2, 2009

														Amount of
														Gain/(Loss)
		Amount of Gain/(Loss)								Location of Gain/(Loss)				Reclassified from
		Recognized in OCI on								Reclassified from				Accumulated OCI into
Derivatives in		Derivatives, Net of Taxes								Accumulated OCI into				Income
Cash Flow		(Effective Portion)								Income				(Effective Portion)
Hedging Relationships		2010				2009				(Effective Portion)				2010				2009
Foreign exchange forward contracts		$	(4,604	)		$	(2,939	)		Cost of goods sold				$	4,553			$	3,865

						Amount of Gain/(Loss)
						Recognized in
Derivatives not Designated		Location of Gain/(Loss) Recognized				Income on Derivatives
as Hedging Instruments		In Income on Derivatives				2010				2009
Foreign exchange forward contracts		Other, net				$	(2,313	)		$	996

During the nine months ended October 2, 2009, the Company de-designated certain cash flow hedges due to settle in the quarter that related to its Japanese yen exposure. Included in other, net above is a net loss of approximately $14 related to these contracts.

Note 4. Share-Based Compensation

Share-based compensation costs were as follows in the quarters and nine months ended October 1, 2010 and October 2, 2009, respectively:

		For the Quarter Ended
		October 1,				October 2,
		2010				2009
Cost of goods sold		$	112			$	252
Selling expense			737				846
General and administrative expense			1,416				485
Total share-based compensation		$	2,265			$	1,583
		For the Nine Months Ended
		October 1,				October 2,
		2010				2009
Cost of goods sold		$	301			$	611
Selling expense			1,909				2,270
General and administrative expense			3,703				1,282
Total share-based compensation		$	5,913			$	4,163

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Page 15

Long Term Incentive Programs

2010 Executive Long Term Incentive Program
On March 3, 2010, the Management Development and Compensation Committee of the Board of Directors approved the terms of The Timberland Company 2010 Executive Long Term Incentive Program (“2010 LTIP”) with respect to equity awards to be made to certain of the Company’s executives and employees. On March 4, 2010, the Board of Directors also approved the 2010 LTIP with respect to the Company’s Chief Executive Officer. The 2010 LTIP was established under the Company’s 2007 Incentive Plan. The awards are subject to future performance, and consist of performance stock units (“PSUs”) equal in value to one share of the Company’s Class A Common Stock, and performance stock options (“PSOs”) with an exercise price of $19.45 (the closing price of the Company’s Class A Common Stock as quoted on the New York Stock Exchange on March 4, 2010, the date of grant). On May 13, 2010, additional awards were made under the 2010 LTIP consisting of PSUs equal in value to one share of the Company’s Class A Common Stock, and PSOs with an exercise price of $22.55 (the closing price of the Company’s Class A Common Stock as quoted on the New York Stock Exchange on May 13, 2010, the date of grant). Shares with respect to the PSUs will be granted and will vest following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The PSOs will vest in three equal annual installments following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The payout of the performance awards will be based on the Company’s achievement of certain levels of revenue growth and earnings before interest, taxes, depreciation and amortization (“EBITDA”), with threshold, budget, target and maximum award levels based upon actual revenue growth and EBITDA of the Company during the applicable performance periods equaling or exceeding such levels. The performance period for the PSUs is the three-year period from January 1, 2010 through December 31, 2012, and the performance period for the PSOs is the twelve-month period from January 1, 2010 through December 31, 2010. No awards shall be made or earned, as the case may be, unless the threshold goal is attained, and the maximum payout may not exceed 200% of the target award.

The maximum number of shares to be awarded with respect to PSUs under the 2010 LTIP is 527,800, which, if earned, will be settled in early 2013. Based on current estimates, unrecognized compensation expense with respect to the 2010 PSUs was $1,968 as of October 1, 2010. This expense is expected to be recognized over a weighted-average remaining period of 2.4 years.

The maximum number of shares subject to exercise with respect to PSOs under the 2010 LTIP is 737,640, which, if earned, will be settled, subject to the vesting schedule noted above, in early 2011. Based on current estimates, unrecognized compensation expense related to the 2010 PSOs was $2,214 as of October 1, 2010. This expense is expected to be recognized over a weighted-average remaining period of 2.4 years.

2009 Executive Long Term Incentive Program
On March 4, 2009, the Management Development and Compensation Committee of the Board of Directors approved the terms of The Timberland Company 2009 Executive Long Term Incentive Program (“2009 LTIP”) with respect to equity awards to be made to certain of the Company’s executives and employees. On March 5, 2009, the Board of Directors also approved the 2009 LTIP with respect to the Company’s Chief Executive Officer. The 2009 LTIP was established under the Company’s 2007 Incentive Plan. The awards are subject to future performance, and consist of PSUs equal in value to one share of the Company’s Class A Common Stock, and PSOs with an exercise price of $9.34 (the closing price of the Company’s Class A Common Stock as quoted on the New York Stock Exchange on March 5, 2009, the date of grant). On May 21, 2009, additional awards were made under the 2009 LTIP consisting of PSUs equal in value to one share of the Company’s Class A Common Stock, and PSOs with an exercise price of $12.93 (the closing price of the Company’s Class A Common Stock as quoted on the New York Stock Exchange on May 21, 2009, the date of grant). Shares with respect to the PSUs will be granted and will vest following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The PSOs will vest in three equal annual installments following the end of the applicable performance period and approval by the Board of Directors, or a committee thereof, of the achievement of the applicable performance metric. The payout of the performance awards will be based on the Company’s achievement of certain levels of EBITDA, with threshold, budget, target and maximum award levels based upon actual EBITDA of the Company during the applicable performance periods equaling or exceeding such levels. The performance period for the PSUs is the three-year period from January 1, 2009 through December 31, 2011, and the performance period for the PSOs was the twelve-month period from January 1, 2009 through December 31, 2009. No

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Page 16

awards shall be made or earned, as the case may be, unless the threshold goal is attained, and the maximum payout may not exceed 200% of the target award.

The maximum number of shares to be awarded with respect to PSUs under the 2009 LTIP is 750,000, which, if earned, will be settled in early 2012. Based on current estimates, unrecognized compensation expense with respect to the 2009 PSUs was $1,581 as of October 1, 2010. This expense is expected to be recognized over a weighted-average remaining period of 1.4 years.

Based on actual performance, the number of shares subject to exercise with respect to PSOs under the 2009 LTIP is 599,619, which shares were settled on March 4, 2010, subject to the vesting schedule noted above.

The Company estimates the fair value of its PSOs on the date of grant using the Black-Scholes option valuation model, which employs the following assumptions:

		2010 LTIP				2009 LTIP
		For the Nine Months Ended				For the Nine Months Ended
		October 1, 2010				October 2, 2009
Expected volatility			47.7	%			41.9	%
Risk-free interest rate			2.7	%			1.9	%
Expected life (in years)			6.1				6.4
Expected dividends			-				-

The following summarizes activity associated with stock options earned under the Company’s 2009 LTIP and excludes the performance-based awards noted above under the 2010 LTIP for which performance conditions have not been met:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value
Outstanding at January 1, 2010			-			$	-
Settled			599,619				9.52
Exercised			-				-
Expired or forfeited			(26,735	)			9.34
Outstanding at October 1, 2010			572,884			$	9.53				8.44			$	5,929
Vested or expected to vest at October 1, 2010			536,524			$	9.52				8.44			$	5,556
Exercisable at October 1, 2010			-				-				-				-

Unrecognized compensation expense related to the 2009 PSOs was $940 as of October 1, 2010. This expense is expected to be recognized over a weighted-average remaining period of 1.6 years.

Stock Options

The Company estimates the fair value of its stock option awards on the date of grant using the Black-Scholes option valuation model, which employs the assumptions noted in the following table, for stock option awards excluding awards issued under the Company’s Long Term Incentive Programs discussed above:

		For the Quarter Ended								For the Nine Months Ended
		October 1,				October 2,				October 1,				October 2,
		2010				2009				2010				2009
Expected volatility			49.6	%			45.9	%			49.0	%			43.3	%
Risk-free interest rate			1.7	%			2.5	%			2.2	%			2.0	%
Expected life (in years)			5.0				5.0				5.0				6.2
Expected dividends			-				-				-				-

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Page 17

The following summarizes transactions for the nine months ended October 1, 2010, under stock option arrangements excluding awards issued under the Company’s Long Term Incentive Programs discussed above:

										Weighted-
						Weighted-				Average
						Average				Remaining
						Exercise				Contractual				Aggregate
		Shares				Price				Term				Intrinsic Value
Outstanding at January 1, 2010			3,908,270			$	25.05
Granted			184,700				20.76
Exercised			(139,206	)			15.06
Expired or forfeited			(193,051	)			27.30
Outstanding at October 1, 2010			3,760,713			$	25.10				4.89			$	5,284
Vested or expected to vest at October 1, 2010			3,708,577			$	25.20				4.83			$	5,149
Exercisable at October 1, 2010			3,236,061			$	26.66				4.25			$	2,678

Unrecognized compensation expense related to nonvested stock options was $2,165 as of October 1, 2010. This expense is expected to be recognized over a weighted-average remaining period of 1.6 years.

Nonvested Shares

Changes in the Company’s nonvested shares and restricted stock units, excluding awards under the Company’s Long Term Incentive Programs discussed above, for the nine months ended October 1, 2010 are as follows:

						Weighted-								Weighted-
						Average								Average
		Stock				Grant Date				Stock				Grant Date
		Awards				Fair Value				Units				Fair Value
Nonvested at January 1, 2010			86,102				$15.59				297,758				$13.74
Awarded			-				-				119,922				21.33
Vested			(61,142	)			18.14				(152,491	)			13.68
Forfeited			-				-				(15,850	)			15.29
Nonvested at October 1, 2010			24,960				$9.34				249,339				$17.33
Expected to vest at October 1, 2010			24,960				$9.34				225,501				$17.22

Unrecognized compensation expense related to nonvested restricted stock awards was $37 as of October 1, 2010. The expense is expected to be recognized over a weighted-average remaining period of 0.4 years. Unrecognized compensation expense related to nonvested restricted stock units was $2,894 as of October 1, 2010. The expense is expected to be recognized over a weighted-average remaining period of 1.4 years.

Note 5.  Earnings Per Share

Basic earnings per share (“EPS”) excludes common stock equivalents and is computed by dividing net income by the weighted-average number of common shares outstanding for the periods presented. Diluted EPS reflects the potential dilution that would occur if potentially dilutive securities such as stock options were exercised and nonvested shares vested, to the extent such securities would not be anti-dilutive.

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The following is a reconciliation of the number of shares (in thousands) for the basic and diluted EPS computations for the quarters and nine months ended October 1, 2010 and October 2, 2009:

		For the Quarter Ended
		October 1, 2010												October 2, 2009
						Weighted-				Per-								Weighted-				Per-
		Net				Average				Share				Net				Average				Share
		Income				Shares				Amount				Income				Shares				Amount
Basic EPS		$	52,195				51,892			$	1.01			$	37,757				55,744			$	.68
Effect of dilutive securities:
Stock options and employee stock purchase plan shares			-				249				(.01	)			-				26				-
Nonvested shares			-				84				-				-				138				-
Diluted EPS		$	52,195				52,225			$	1.00			$	37,757				55,908			$	.68
		For the Nine Months Ended
		October 1, 2010												October 2, 2009
						Weighted-				Per-								Weighted-				Per-
		Net				Average				Share				Net				Average				Share
		Income				Shares				Amount				Income				Shares				Amount
Basic EPS		$	54,490				53,098			$	1.03			$	34,390				56,385			$	.61
Effect of dilutive securities:
Stock options and employee stock purchase plan shares			-				297				(.01	)			-				23				-
Nonvested shares			-				136				-				-				284				-
Diluted EPS		$	54,490				53,531			$	1.02			$	34,390				56,692			$	.61

The following securities (in thousands) were outstanding as of October 1, 2010 and October 2, 2009, but were not included in the computation of diluted EPS as their inclusion would be anti-dilutive:

For the Quarter Ended

For the Nine Months Ended

October 1, 2010

October 2, 2009

October 1, 2010

October 2, 2009

Anti-dilutive securities

3,213

3,994

2,861

4,056

Note 6.  Comprehensive Income

Comprehensive income for the quarters and nine months ended October 1, 2010 and October 2, 2009 is as follows:

		For the Quarter Ended								For the Nine Months Ended
														October 2,
		October 1, 2010				October 2, 2009				October 1, 2010				2009
Net income			$52,195				$37,757				$54,490				$34,390
Change in cumulative translation adjustment			8,462				3,838				(3,528	)			7,220
Change in fair value of cash flow hedges, net of taxes			(11,974	)			(731	)			(5,508	)			(7,568	)
Change in other adjustments, net of taxes			36				-				(10	)			-
Comprehensive income			$48,719				$40,864				$45,444				$34,042

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The components of accumulated other comprehensive income as of October 1, 2010, December 31, 2009 and October 2, 2009 were:

		October 1, 2010				December 31, 2009				October 2, 2009
Cumulative translation adjustment			$10,125			$	13,653			$	14,996
Fair value of cash flow hedges, net of taxes of $(242) at October 1, 2010, $47 at December 31, 2009 and $(155) at October 2, 2009			(4,604	)			904				(2,939	)
Other adjustments, net of taxes of $110 at October 1, 2010, $147 at December 31, 2009 and $7 at October 2, 2009			481				491				138
Total			$6,002			$	15,048			$	12,195

Note 7.  Business Segments and Geographic Information

The Company has three reportable segments: North America, Europe and Asia. The composition of the segments is consistent with that used by the Company’s chief operating decision maker.

The North America segment is comprised of the sale of products to wholesale and retail customers in North America. It includes Company-operated specialty and factory outlet stores in the United States and our United States e-commerce business. This segment also includes royalties from licensed products sold worldwide, the related management costs and expenses associated with our worldwide licensing efforts, and certain marketing expenses and value-added services. Beginning in the first quarter of 2010, results for the North America segment include certain U.S. distribution expenses, customer operations and service costs, credit management and short-term incentive compensation costs that were recorded in Unallocated Corporate in prior quarters. These costs in prior periods have been reclassified to North America to conform to the current period presentation.

The Europe and Asia segments each consist of the marketing, selling and distribution of footwear, apparel and accessories outside of the United States. Products are sold outside of the United States through our subsidiaries (which use wholesale, retail and e-commerce channels to sell footwear, apparel and accessories), franchisees and independent distributors. Certain distributor revenue and operating income reflected in our Europe segment in prior periods has been reclassified to Asia to conform to the current period presentation. Additionally, certain expenses, primarily related to short-term incentive compensation costs previously reported in Unallocated Corporate, have been reclassified to Europe and Asia to conform to the current period presentation.

Unallocated Corporate consists primarily of corporate finance, information services, legal and administrative expenses, share-based compensation costs, global marketing support expenses, worldwide product development costs and other costs incurred in support of Company-wide activities. Unallocated Corporate also includes certain value chain costs such as sourcing and logistics, as well as inventory variances. Beginning in the first quarter of 2010, certain U.S. distribution and other customer related expenses, and short-term incentive compensation costs previously reported in Unallocated Corporate were reclassified to North America, Europe and Asia. Additionally, Unallocated Corporate includes total other income/(expense), net, which is comprised of interest income, interest expense, and other, net, which includes foreign exchange gains and losses resulting from changes in the fair value of financial derivatives not designated as hedges, currency gains and losses incurred on the settlement of local currency denominated assets and liabilities, and other miscellaneous non-operating income/(expense). Such income/(expense) is not allocated among the reportable business segments.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate segment performance based on revenue and operating income. Total assets are disaggregated to the extent that assets apply specifically to a single segment. Unallocated Corporate assets primarily consist of cash and equivalents, tax assets, manufacturing/sourcing assets, computers and related equipment, and transportation and distribution equipment.

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Page 20

Operating income/(loss) shown below for the nine months ended October 1, 2010 includes impairment charges of $8,172 and $5,077 in North America and Europe, respectively, related to goodwill and certain other intangible assets. Operating income for North America for the nine months ended October 1, 2010 also includes gains related to the termination of licensing agreements of $3,000. Operating income for Europe for the nine months ended October 2, 2009 includes an impairment charge of $925 related to a certain intangible asset. See Notes 2 and 9 to the unaudited condensed consolidated financial statements for additional information.

For the Quarters Ended October 1, 2010 and October 2, 2009

														Unallocated
		North America				Europe				Asia				Corporate				Consolidated
2010
Revenue			$181,501			$	204,154			$	46,689			$	-			$	432,344
Operating income/(loss)			43,520				51,320				6,174				(34,479	)			66,535
Income/(loss) before income taxes			43,520				51,320				6,174				(28,925	)			72,089
Total assets			316,962				349,825				74,966				132,704				874,457
Goodwill			31,964				6,994				-				-				38,958
2009
Revenue			$188,247			$	194,511			$	39,008			$	-			$	421,766
Operating income/(loss)			41,607				41,488				4,275				(28,889	)			58,481
Income/(loss) before income taxes			41,607				41,488				4,275				(26,274	)			61,096
Total assets			320,014				341,065				60,675				128,610				850,364
Goodwill			36,876				7,477				-				-				44,353