Case Study "Timberland - Accounting for Sustainability" & DB WK 7

11006398

To Our Shareholders

2010 marked an important turning point for Timberland

With brand-right top line growth strong earnings

increases and rock-solid balance sheet 2010 was

the culmination of disciplined focus on our business

and targeted investments in our brand We grew

revenue across North America Europe and Asia We

grew Classics Earthkeepers and Outdoor Adventure

We grew mens womens and kids We grew our retail

footprint and our comparable store sales We grew

footwear apparel and accessories As our progress

shows we have the right strategy and the right team

in place to grow Timberland into the number one

outdoor brand on Earth

At the heart of our performance is uniquely

Timberland brand story of authenticity sustainability

and deep roots in the New England outdoors

Authenticity runs throughout our products but

is especially evident in our Classics category the

foundation of our brand and our business In 2010

our global Classics business returned to growth

and helped to provide stable foundation for our

key growth initiatives

2010 was breakthrough year for the product line

at the center of our growth strategy Earthkeepers

With annual sales increases in the triple digits in every

region and across all genders Earthkeepers not

only grew our business but also served as platform

for breaking through with women huge growth

opportunity for Timberland Nowhere is our brands

commitment to sustainability more clear than with

Earthkeepers unique combination of beautiful and

rugged outdoor-capable product built with green

materials and green processes

In North America big ideas like Earthkeepers and

Outdoor Adventure helped to revitalize our brand and

spurred positive annual revenue growth in the region

for the first time in several years Europe continued to

produce strong results with mens womens and kids

revenue up double digits across consumer direct and

wholesale channels Asia also turned in an impressive

performance with growth in every country including

China where revenue more than doubled

2010 was many years in the making Our strong revenue

and earnings growth was built on resurgence of brand

momentum globallymomentum that was created

through relentless commitment to telling our story

But our journey is not complete 2010 was one step

along Timberlands path to becoming the number one

outdoor brand on Earth And well continue to travel

that path until weve reached our destination

Jeffrey Swartz

President and Chief Executive Officer

SOUTH FREEPORT MAINE

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BOARD OF DIRECTORS Ian Diery

Cha rman President and Chief Executive Officer Electronic Scr Inc

John Fltzsimmons

Retired Senior Vice President Consumer Electronics Circuit City Stores Inc

AndrØ Hawaux

President of Consumer Foods ConAgra Foods Inc

Virginia Kent

Independent Consultant Formerly President and

Chief Executive Offcer reflect corn

Kenneth Lombard

Partner and Chief Investment Officer Capri Capital Partners

Formerly President Starbucks Entertainment Starbucks Coffee Company

Edward Moneypenny Retired Senior Vice PresidentFinance and

Chief Financial Officer 7-Eleven Inc

Peter Moore

President EA SPORTS Label

Bill Shore

Founder and President Share Our Strength

Jeffrey Swartz

President and Chief Executive Officer The Timberland Company

Sidney Swartz

Chairman The Timberland Company

Terdema Ussery II

President and Chief Executive Officer Dallas Mavericks

Chief Executive Officer HDNet

Carden Welsh

Sen or Vice President and Chief Adm nistrative Officer

The Timberland Company

CORPORATE OFFICERS Sidney Swartz

Chairman

Jeffrey Swartz

President and Chief Executive Oficer

Michael Harrison

Chief Brand Officer

Carden Welsh

Senior Vice President and Chief Administrative Officer

Carrie Teffner

Vice President ano Chief Financial Officer

Richard ORourke

Senior Vice President International

John Fitzgerald Jr

Vice President Corporate Controller and Chief Accounting Officer

Daflette Wineberg Vice Presdent General Counsel and Secretary

Michelle Hanson

Assistant Secretary

CORPORATE HEADQUARTERS 200 Domain Drive Stratham NH 03886

INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM Deloitte Touche LLP

Boston Massachusetts

FINANCIAL INFORMATION

To request information such as this annual report our Form 10-K for

the fiscal year ended December 31 2010 as filed with the Securities and

Exchange Commission and corporate governance information please visit

our webste www.timberland.com call our investor hotline at 603-773-

1655 or send written request to the attention of Investor Relations at our

corporate address or the a-ma address investor re ations@timberland

corn Timberlands Corporate Social Responsibility report is also available

on our website

CLASS COMMON STOCK LISTING New York Stock Exchange TBL

STOCK SPLITS

Record Date

08/31/99

06/30/00

04/14/05

DIVIDEND POLICY

The Company has never declared dividend on its Common Stock

and the Companys ability to pay cash dividends in limited pursuant

to cred agreements see notes to the Companys consolidated

financial statements

STOCK CERTIFICATES NAME CHANGES OR TRANSFERS

Computershare Trust Company N.A

P0 Box 43078

Providence RI 02940-3078

877-282-1168

www.computershare.com

NEW YORK STOCK EXCHANGE CERTIFICATION DISCLOSURE

The Company submitted Section 303A.12a Annual CEO Certification

to the Nevi York Stock Exchange in 2010 The Compdny also filed with the

Securities and Exchange Commission its Annual Report on Form 10-K for

the fiscal years ended December 31 2010 and December 31 2009 each of

which contained as exhibits its Chief Executive Officer and Chief Financial

Officer certifications as required under Section 302 of the Sarbanes-Oxley

Act of 2002

Corporate Structure

Effective Date

09/15/99

07/1 7/00

05/02/OS

Split

2-for-i

2-for-i

2-for-i

Kristlne Marvin

Assistant Secretary

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington DC 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31 2010

OR TRANSITION REPORT PURSUANT TO SECTION 13 OR OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to________

Commission File Number 1-9548

The Timberland Company Exact name of registrant as specified in its charter

200 Domain Drive Stratham New Hampshire

Address of principal executive offices

Registrants telephone number including area code

603 772-9500 Securities registered pursuant to Section 12b of the Act

Title of Each Class Name of Each Exchange on Which Registered

Class Common Stock par value $.Ol per share New York Stock Exchange

Securities registered pursuant to Section 12g of the Act None

Indicate by check mark if the registrant is well-known seasoned issuer as defined in Rule 405 of the Securities

Act Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Act Yes 21 No

Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15d 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 has been subject to such filing requirements for the past 90 days 12 Yes 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-I 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 121 Yes No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 229.405 of this chapter is

not contained herein and will not be contained to the best of the registrants knowledge in definitive proxy or information

statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K

Indicate by check mark whether the registrant is large accelerated filer an accelerated filer non accelerated filer or

smaller reporting company See the definitions of large accelerated filer accelerated filer and smaller reporting company in

Rule 12b-2 of the Exchange Act

Accelerated filer Non-accelerated filer Smaller reporting company

Do not check if smaller reporting company Indicate by check mark whether the registrant is shell company as defined in Rule 12b-2 of the Act Yes 12 No

The aggregate market value of Class Common Stock of the Company held by non-affiliates of the Company was $635270723 on July 2010 which was the last business day of the Companys second fiscal quarter in 2010 For purposes of

the foregoing sentence the term affiliate includes each director and executive officer of the Company See Item 12 of this

Annual Report on Form 10-K

On February 10 2011 39948551 shares of the Companys Class Common Stock and 10568389 shares of Class Common Stock were outstanding

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Companys definitive Proxy Statement for the 2011 Annual Meeting of Stockholders to be filed pursuant to

Regulation 14A are incorporated by reference in Part III Items 10 11 12 13 and 14 of this Annual Report on Form 10-K

Mark One

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Delaware

State or other jurisdiction

of incorporation or organization

02-0312554

I.R.S Employer

Identification No

03885

Zip Code

Large accelerated filer 12

PART

ITEM BUSINESS

Overview

The Timberland Company was incorporated in Delaware on December 20 1978 We are the successor to

the Abington Shoe Company which was incorporated in Massachusetts in 1933 We refer to The Timberland

Company together with its subsidiaries as we our us its Timberland or the Company We design develop and market premium quality footwear apparel and accessories products for men

women and children under the Timberland Timberland PRO Timberland Boot Company SmartWool and howies brands We sell our products to retail accounts through our wholesale channel through

Timberland-owned retail including stores and Internet sales and through mix of independent distributors

franchisees and licensees worldwide

Our principal strategic goal is to become the Outdoor Brand on Earth by offering an integrated product

selection that equips consumers to enjoy the experience of being in the outdoors Our ongoing efforts to

achieve this goal include enhancing our leadership position in our core Timberland footwear business

through an increased focus on technological innovation arid big idea initiatives like EarthkeepersTM

ii expanding our global apparel and accessories business by leveraging the brands equity and initiatives

through combination of in-house development and licensing arrangements with trusted partners iii expand

ing our brands geographically iv driving operational and financial excellence setting the standard for

social and environmental responsibility and vi striving to be an employer of choice

Products

Our products fall into two primary categories footwear and apparel and accessories We also

derive royalty revenue from third party licensees and distributors that produce and/or sell our products under

license The following summarizes the percentage of our revenues derived from each of these categories for

the past three years

Category 2010 2009 2008

Footwear 72.5% 72.4% 71.4%

Apparel and Accessories 25.8% 25.6% 26.9%

Royalty and Other 1.7% 2.0% 1.7%

Footwear

In 1973 we produced our first pair of waterproof leather boots under the Timberland brand We now

offer broad variety of footwear products for men women and children featuring premium materials and

state-of-the-art design and construction Our Timberland mens footwear products emphasize durability

comfort and craftsmanship Our Timberland womens footwear line combines beautiful styling performance

features and eco-conscious materials Our Timberland kids footwear products are designed and engineered

specifically for kids with the same high-quality standards and materials as our adult footwear products

combining Timberlands heritage of premium leathers and craftsmanship with focus on fit functionality and

convenience

Timberland brand footwear offerings within each of our mens womens and kids lines include basic

premium and sports boots including hikers ii handsewn oxfords boat shoes and casual footwear and

iii performance footwear The Timberland PRO series for skilled tradespeople and working professionals is an additional footwear category we developed to address those consumers distinct needs

Some of the principal features ofour boot products include premium waterproof leather direct-attach and

seam-sealed waterproof construction rubber lug outsoles for superior traction and abrasion resistance shock

diffusion plates durable laces padded collars for comfortable fit enhanced insulation rustproof hardware for

durability and moisture-wicking components for comfort and breathability Our casual footwear is rooted in

our conmiitment to the environment craftsmanship and innovation design ethos which results in products

made from superior earth-conscious materials and characterized by enhanced comfort Our performance

footwear continues to address the needs of outdoor recreationalists and enthusiasts of all levels offering

technical end-use driven products for outdoor adventures from summit to sea and everywhere in between

Additionally we offer premium-priced elite collections which we distribute via selective boutique channels

in major markets

The Timberland PRO series targets working professionals whose jobs demand footwear that stands up to the harshest working conditions Timberland PRO has an assortment of occupational footwear products across

categories including Industhal Healthcare and Duty and builds on the marketplace success of its Anti-Fatigue

Technology system of geometrically designed cones that provide the consumer with increased standing

tolerance providing more energy throughout their work day Timberland PRO serves customers in Canada with

line of occupational products built specifically for the Canadian market and continues to expand its

occupational offering internationally with licensing agreement with Sperian Protection for Europe as well as

parts of the Middle East and Africa

Footwear Technology

Our advanced concepts footwear team focuses on developing the next innovations in our footwear

technologies including materials constructions and processes few of our most frequently used technolog

ical innovations are the Smart Comfort system which incorporates multi-density footbed and allows

footwear to expand and contract with the changing shape of the foot during the walking motion while

preserving the essential style of the footwear the Timberland Agile IQ system which delivers improved

stability shock absorption and fit and the Anti-Fatigue platform first developed for Timberland PRO

consumers who spend many hours on their feet every day In addition we use Green RubberTM compound to

make outsoles containing recycled rubber for our EarthkeepersTM and Mountain Athletics lines We have also

recently introduced BionicTM canvas fabric made with recycled material and organic cotton ion-maskTM

super water-repellency treatment and Pebaxtm foam super lightweight foam into our footwear and/or

apparel We maintain numerous patented and other technologies for use in our footwear apparel and

accessories

Apparel and Accessories

Timberland and Timberland PRO Series

Timberlands apparel for men women and kids continues to offer outdoor adventure and outdoor leisure

products that combine performance benefits and versatile styling We believe that continuing to develop and

expand our apparel business is important to our global brand aspirations and that experienced licensing

partners will help us maximize our brand potential in apparel We have licensing arrangements with Phillips- Van Heusen Corporation for mens apparel in North America and Mediterranea S.r.l for womens apparel in

Europe Childrens Worldwide Fashion S.A.S our longstanding licensing partner continues to make market

and distribute our kids apparel in Europe and Asia In the United States beginning with the Spring season in

2011 Parigi Group will make market and distribute our kids apparel as we transition from KHQ Investment LLC We design and market Timberland mens apparel for our European and Asian operations through our London-based International Design Center which enables us to remain close to our target consumers Li

Fung Trading Limited is our buying agent to source this apparel for us We offer Timberland PRO apparel in Europe pursuant to licensing arrangement that has been in effect since 2004

key driver of our mens and womens apparel lines is our EarthkeepersTM initiative which reflects the

intersection of product design and environmental stewardship Organic recycled and renewable materials have

all been introduced into the lines to further our ongoing commitment to minimize our environmental impact

and appeal to an environmentally-aware consumer

Smart Wool

SmartWool extends our enterprises reach by offering apparel and accessories to the active outdoor

consumer SmartWool is mountain-based apparel brand located in Steamboat Springs CO that delivers

extraordinary comfort through products designed for an active-outdoor life The company brings the lessons of

active-mountain life to bear on business and apparel that has redefined the experience of wearing wool

allowing consumers to do what they love to do longer

SmartWool offers consumers premium technical layering system of merino wool apparel socks and

accessories that are designed to work together jn fit form and function Its key product categories are

Next-to-Skin Baselayers Thermal Midlayers and Performance Socks Additionally SmartWool has growing

line of performance accessories including technical ski gloves hats balaclavas neck gaiters and scarves

The merino wool fiber used in SmartWool products is superior at moisture management and temperature

control and is naturally odor free SmartWool products are sold through premium outdoor and specialty

retailers outdoor chains better department stores and online at www.smartwool.com

howies Limited

howies Limited is an active sports apparel brand founded on the idea of designing and manufacturing

clothing for the socially engaged and environmentally conscious action sports and outdoor consumer howies

uses high quality materials and pursues lower impact building processes and sourcing strategies all of which

help howies make innovative product while minimizing its impact on the environment We sell howies

products through seasonal catalogs howies-owned retail including stores and the Internet and through mix

of independent retailers howies main office is located in Cardigan Bay Wales U.K

Third-party Licensing

Third-party licensing enables us to expand our brand reach to appropriate and well-defined categories and

to benefit from the expertise of the licensees in manner that reduces the risks to us associated with pursuing

these opportunities We receive royalty on sales of our licensed products We continue to focus on closely

aligning our licensed products and distribution to our strategic brand initiatives and long range strategies and

to build better integration across these products to present seamless brand worldwide We license rights to childrens apparel worldwide mens apparel in North America and womens apparel in Europe The

accessories products we license generally include packs and travel gear womens handbags belts wallets

socks headwear gloves watches sunglasses eyewear and ophthalmic frames and various other small leather

goods and are designed manufactured and distributed pursuant to variety of exclusive and non-exclusive

licensing agreements with third parties We also offer Timberland PRO footwear and apparel in Europe under license agreement

Product Sates Business Segments and Operations by Geographic Area

Our products are sold by us as well as our distributor partners in the United States and internationally

primarily through independent outdoor retailers independent footwear retailers better department stores

athletic stores and other national retailers which reinforce the high level of quality performance and service

associated with the Timberland brand and business In addition our products are sold by us as well as our

distributor and franchise partners in Timberland specialty stores and Timberland factory outlet stores

dedicated exclusively to selling Timberland products and Timberland sub-branded products We also sell our

products in the United States online at www.timberland.com and www.smartwool.com in the United Kingdom

online at www.timberlandonline.co.uk and www.howies.co.uk and in Japan online at

www.shop.timberland.co.jp

We operate in an industry that includes the designing engineering marketing and distribution of footwear

apparel and accessories products for men women and children We manage our business in the following three

reportable segments each segment sharing similar product distribution and marketing North America Europe

and Asia

The North America segment is comprised of the sale of products to wholesale customers in the

United States and Canada as well as the Company-operated specialty and factory outlet stores in the

United States and our U.S e-commerce businesses This segment also includes royalties from licensed

products sold worldwide the management costs and expenses associated with our worldwide licensing efforts

and certain marketing expenses and value added services The Europe and Asia segments consist of the

marketing selling and distribution of footwear apparel and accessories and licensed products outside of North

America Products are sold outside of the United States through our subsidiaries which us wholesale and retail channels including e-commerce in the United Kingdom and Japan to sell footwear apparel and

accessories independent distributors franchisees and licensees

The following table presents the percentage of our total revenue generated by each of these reportable

segments for the past three years

2010 2009 2008

North America 45.3% 47.4% 47.8%

Europe 41.4% 41.1% 40.4%

Asia 13.3% 11.5% 11.8%

More detailed information regarding these reportable segments and each of the geographic areas in which

we operate is set forth in Note 14 to our consolidated financial statements entitled Business Segments and

Geographic Information in Part II Item of this Annual Report on Form 10-K

North America

Our wholesale customer accounts within North America include independent outdoor retailers indepen

dent footwear retailers better department stores national athletic accounts general sporting goods retailers

and other national accounts Many of these wholesale accounts merchandise our products in selling areas

dedicated exclusively to our products These concept shops display the breadth of our product line and brand

image to consumers and are serviced through combination of field and corporate-based sales teams

responsible for these distribution channels We also service our wholesale accounts through our principal showroom in New York City and regional showrooms in Atlanta Georgia Dallas Texas and Miami Florida

SmartWool products are sold in the United States through sales agents and in Canada through

distributors SmartWool products are also available in Company-owned Timberland specialty stores in the

United States as well as online at www.smartwool.com

At December 31 2010 in the United States we operated 10 specialty stores which carry current season first quality merchandise including footwear apparel and accessories and 56 factory outlet stores which

serve as primary channel for the sale of excess damaged or discontinued products from our specialty stores

and also sell products specifically made for them We also sell products online through our Internet store at

www.timberland.com Our online store allows U.S consumers to purchase current season first quality

merchandise over the Internet This Internet site also provides information about Timberland including the

reports we file with or furnish to the Securities and Exchange Commission investor relations corporate

governance community involvement initiatives and employment opportunity information Additionally the site

serves to reinforce our marketing efforts We also sell products online through our Internet store at

www.smartwool.com

Europe

We sell our products in Europe through our sales subsidiaries in the United Kingdom Italy France

Germany Switzerland Austria Belgium the Netherlands and Spain All of these sales subsidiaries provide

support for the sale of our products to wholesale customers and/or operate Timberland stores in their

respective countries At December 31 2010 we operated 47 specialty stores and shops and 17 factory outlet

stores in Europe We sell products through our international online store in the United Kingdom www.timberlandonline.co.uk Timberland products are also sold in Europe the Middle East Africa Central

America and South America by distributors franchisees and commissioned agents some of which may also

operate Timberland stores located in their respective countries

SmartWool products are sold in Europe the Middle East and Africa through combination of agents and distributors and are also available in Company-owned Timberland stores as well as online at

www.timberlandonline.co.uk

Located in the United Kingdom howies Limited develops and markets active sports apparel and sells its

products through howies-owned retail stores catalogs online at www.howies.co.uk and through independent

retailers

Asia

We sell our products in Asia through our sales subsidiaries in Japan Hong Kong Singapore Taiwan China and Malaysia Most of these sales subsidiaries provide support for the sale of our products to wholesale

customers and operate Timberland stores in their respective countries One such wholesale customer

accounted for approximately 18% of the segments revenue during the year ended December 31 2010 At

December 31 2010 we operated 75 company-owned specialty stores and shops and 21 factory outlet stores in

Asia We also sell products through our online store in Japan at www.shop.timberland.co.jp

Timberland products are sold elsewhere in Asia and Australasia by distributors franchisees and

commissioned agents some of which may also operate Timberland stores located in their respective

countries We intend to continue expanding the Timberland brand into new markets and consumer segments to strengthen our position as leading global brand SmartWool products are sold in Asia through distributors

and are also available in Company-owned Timberland stores

Distribution

We distribute our products through three Company-managed distribution facilities which are located in

Danville Kentucky Ontario California and Enschede Netherlands and through third-party managed distribu

tion facilities which are located in Canada and Asia

Advertising and Marketing

The Companys overall marketing strategy is to develop category and consumer-specific plans and

advertising and related promotional materials for U.S and international markets to foster differentiated

approach with consistent image for each of the Companys big product ideas Marketing campaigns and

strategies vary by product idea and may target accounts and/or end users as they strive to increase overall

brand awareness and purchase intent The Companys advertisements typically emphasize outdoor perfor

mance environmental features quality durability and other performance and lifestyle aspects of the

Companys products Components of the category and consumer-specific plans vary and may include online

print radio and television advertising events public relations in-store point of purchase displays promotional

materials and sales and technical assistance

Seasonality

In 2010 our revenue was higher in the last two quarters of the year than in the first two quarters which

is consistent with our historical experience Accordingly the amount of fixed costs related to our operations

represented larger percentage of revenue in the first two quarters of 2010 than in the last two quarters of

2010 We expect this seasonality to continue in 2011

Backlog

At December 31 2010 our backlog of orders from our customers was $335 million compared to

$281 million at December 31 2009 and $278 million at December 31 2008 While all orders in the backlog

are subject to cancellation by customers we expect that the majority of such orders will be filled in 2011 We

believe that backlog is an imprecise indicator of revenue that may be achieved because backlog relates only to

wholesale orders for the next season excludes potential sales at Timberland-owned retail during the year and

is affected by seasonality Accordingly comparison of backlog from period to period is not necessarily

meaningful and may not be indicative of eventual actual shipments or the growth rate of sales from one

period to the next

Manufacturing

We operate manufacturing facility in the Dominican Republic where we manufacture four different

construction footwear types for both Timberland boots and shoes as well as our Timberland PRO series footwear We believe we benefit from our internal manufacturing capability which provides us with sourcing for our core assortment planning efficiencies and lead time reduction refined production techniques including

the ability to customize boots and handsewns and favorable duty rates and tax benefits We manufactured

approximately 12% of our footwear unit volume in the Dominican Republic during 2010 compared to

approximately 10% in 2009 and 11% in 2008 The remainder of our footwear products and all of our apparel and accessories products were produced by independent manufacturers and licensees in Asia Europe Africa

the Middle East and North South and Central America Approximately 88% of the Companys 2010 footwear

unit volume was produced by independent manufacturers in China Vietnam Thailand and India Three of

these manufacturing partners together produced approximately 60% of the Companys 2010 footwear volume

The Company continually evaluates footwear production sources in other countries to maximize cost

efficiencies maintain adequate production capacity diversify its manufacturing base and keep pace with

advanced production techniques

We maintain product quality management group which develops reviews and updates our quality and

production standards To help ensure such standards are met the group also conducts product quality audits at

our factories and distribution centers and our independent manufacturers factories and distribution centers We

have offices in Bangkok Thailand Zhu Hai China Ho Chi Minh City Vietnam and Chennai India to

supervise our footwear sourcing activities conducted in the Asia-Pacific region Li Fung Trading Limited

our apparel buying agent in Asia also performs such functions in certain locations

Materials

In 2010 seven suppliers provided in the aggregate approximately 80% of our leather purchases Three

of these suppliers together provided approximately 50% of our leather purchases in 2010 We historically have

not experienced significant difficulties in obtaining leather or other materials in quantities sufficient for our

operations although in 2010 due to increased demand for leather we experienced some capacity constraints

Our gross profit margins are adversely affected to the extent that the selling prices of our products do not

increase proportionately with increases in the costs of leather and other materials Any significant unantici

pated increase or decrease in the prices of these commodities could materially affect our results of operations

We attempt to manage this risk as we do with all other footwear and non-footwear materials on an ongoing basis by monitoring related market prices working with our suppliers to achieve the maximum level of

stability in their costs and related pricing seeking alternative supply sources when necessary and passing

increases in commodity costs to our customers to the maximum extent possible when they occur We cannot

assure you that such factors will protect us from future changes in the prices for such materials

In addition we have established central network of suppliers through which our footwear manufacturing

facilities and independent footwear manufacturers can purchase materials We seek sources of materials local

to manufacturers in an effort to reduce lead times while maintaining our high quality standards We believe

that key strategic alliances with leading materials vendors help reduce the cost and provide greater consistency

of materials procured to produce Timberland products and improve compliance with our production

standards We continue to work to offset cost increases with cost savings by reducing complexity utilizing new lower cost suppliers and consolidating existing suppliers In 2010 we maintained contracts with global vendors for leather thread for hand-sewn styles leather laces waterproof membrane gasket material

waterproof seam-seal adhesives topline reinforcement tape packaging laces box toes and counters cellulose

and nonwoven insole board Strobel construction insole materials and thread synthetic suede lining materials

soling components and compounds and packaging labels

Trademarks and Trade Names Patents ReseaEch Development

Our principal trade name is The Timberland Company and our principal trademarks are Timberland and

our tree design logo which have been registered in the United States and many foreign countries In addition

we own many other trademarks that we utilize in marketing our products Some of the more frequently used

marks include the PRO design Timberland PRO Timberland Boot Company Earthkeepers Green Index Mountain Athletics SmartWool and howies

We regard our trade name and trademarks as valuable assets and believe that they are important factors in

marketing our products We seek to protect and vigorously defend our trade name and trademarks against

infringement under the laws of the United States and other countries In addition we seek to protect and

vigorously defend our patents designs copyrights and all other proprietary rights covering components and

features used in various footwear apparel and accessories under applicable laws

We conduct research design and development efforts for our products on continual basis including field testing of number of our products to evaluate and improve product performance In addition we engage in research and development related to new production techniques and to improving the function performance

reliability and quality of our footwear We have also dedicated resources to an international design and

development team based in Europe Our expenses relating to research design and development have not

represented material expenditure relative to our other expenses

Competition

Our footwear apparel and accessories products are marketed in highly competitive environments that are

subject to changes in consumer preference Product quality performance design styling and pricing as well

as consumer awareness are all important elements of competition in the footwear apparel and accessories

markets we serve Although the footwear industry is fragmented to great degree many of our competitors

are larger and have substantially greater resources than we do including athletic shoe companies several of

which compete directly with some of our products In addition we face competition from retailers that have

established products under private labels and from direct mail companies in the United States The competition

from some of these competitors is particularly strong where such competitors business is focused on one or

few product categories or geographic regions in which we also compete However we do not believe that any

of our principal competitors offers complete line of products that provides the same quality and performance

as the complete line of Timberland Timberland PRO SmartWool Timberland Boot Company and howies footwear apparel and accessories products

Environmental Matters

Compliance with federal state and local environmental regulations has not had nor is it expected to have

any material effect on our capital expenditures earnings or competitive position based on information and

circumstances known to us at this time

Employees

We had approximately 5600 full and part-time employees worldwide at December 31 2010 Our

management considers our employee relations to be good None of our employees are represented by labor

union and we have never suffered material interruption of business caused by labor disputes involving our

own employees

Available Information

Our annual report on Form 10-K quarterly reports on Form l0-Q current reports on Form 8-K and exhibits

and amendments to those reports that are filed with Or furnished to the Securities and Exchange Commission

referred to as the SEC are made available free of charge through our website www.timberland.com as soon as

reasonably practicable after we electronically file them with or furnish them to the SEC The public may also

read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 Street NE Washington D.C 20549 In addition the SEC maintains an Internet site that contains reports proxy and

itiformation statements and other information regarding issuers like us that file electronically with the SEC at

http//www.sec.gov The charters for our Audit Committee Governance and Nominating Committee Management

Development and Compensation Committee and Corporate Social Responsibility Committee as well as our

Corporate Governance Principles and Code of Ethics and other corporate information are available free of charge

through our website www.timberland.com You may request copy of any of the above documents by writing to

the Companys Secretary at The Timberland Company 200 Domain Drive Stratham New Hampshire 03885

We submitted to the New York Stock Exchange in 2010 the certification required by Section 303A 12 of

the New York Stock Exchange Listed Company Manual

Executive Officers of the Registrant

The following table lists the names ages and principal occupations during the past five years of our

executive officers All executive officers serve at the discretion of our Companys Board of Directors Except

as otherwise noted below all positions listed for particular officer are positions with The Timberland

Company or one of its subsidiaries

Name Age Principal Occupation During the Past Five Years

Sidney Swartz 74 Chairman of the Board since June 1986 Chief

Executive Officer and President June 1986 June

1998

Jeffrey Swartz 50 President and Chief Executive Officer since

June 1998 Jeffrey Swartz is the son of Sidney

Swartz

Carden Welsh 57 Senior Vice President and Chief Administrative

Officer since September 2007 Treasurer of

New Hampshire U.S Congressional Campaign 2007 Advisory Board The Trust for Public Land-

New Hampshire conservation organization devoted

to conserving land as parks gardens and other

natural places 2006-2007 Masters studies at

University Of New Hampshire 2003-2006

Michael Harrison 50 Chief Brand Officer since July 2009 Co-President

Timberland brand December 2007 June 2009

President Casual Gear February 2007

December 2007 Senior Vice President Worldwide

Sales and Marketing February 2006 February

2007 Senior Vice President and General Manager

International November 2003 February 2006

Carrie Teffner 44 Vice President and Chief Financial Officer since

September 2009 Senior Vice President and Chief

Financial Officer Sara Lee International Household

and Body Care 2008-2009 Senior Vice President

and Chief Financial Officer Sara Lee Foodservice

2007-2008 Senior Vice President Financial

Planning Analysis and Treasurer Sara Lee

Corporation 2005-2007 Sara Lee Corporation is

global manufacturer and marketer of high quality

brand name consumer products

Richard ORourke 58 Senior Vice President International since January 2011 Vice President and Managing Director Europe and Distributors 1998 December 2010

John Fitzgerald Jr 48 Vice President Corporate Controller and Chief

Accounting Officer since December 2008 Vice

President Finance for Worldwide Sales and

Marketing January 2006 December 2008

Danette Wineberg 64 Vice President and General Counsel since October

1997 and Secretary since July 2001

ITEM 1A RISK FACTORS

Special 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 safe harbor

for certain written and oral forward-looking statements to encourage companies to provide prospective

information Prospective information is based on managements 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 below identifies important factors that could

affect the Companys 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 below are not

exhaustive Other sections of this report may include additional factors which could adversely affect the

Companys business and financial performance Moreover the Company operates in 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

Companys 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 prediction of actual results

As discussed herein 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 Annual 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

The Company undertakes no obligation to update publicly any forward-looking statements whether as

result of new information future events or otherwise

Risks Related to Our Business

We operate in highly competitive industry

We market our products in highly competitive environments Many of our competitors are larger and have

substantially greater resources for marketing research and development and other purposes These competitors

include athletic and other footwear companies branded apparel companies and private labels established by

retailers Furthermore efforts by our competitors to dispose of their excess inventory could put downward

pressure on retail prices and could cause our wholesale customers to redirect some of their purchases away

from our products

We may have difficulty matching our products and inventory levels to consumer preferences and demand

As we continue to market established products and develop new products our success depends in large

part on our ability to anticipate understand and react to changing consumer demands We believe that our

more fashion-focused products are more susceptible to changing fashion trends and consumer preferences than

our other products Our products must appeal to broad range of consumers whose preferences cannot be

predicted with certainty and are subject to rapid change The success of our products and marketing strategy

will also depend on favorable reception by our wholesale customers We cannot ensure that any existing

products or brands will continue to be favorably received by consumers or our wholesale customers nor can

we ensure that any new products or brands that we introduce will be favorably received by consumers or our

wholesale customers Any failure on our part to anticipate identify and respond effectively to changing

consumer demands and fashion trends could adversely affect retail and consumer acceptance of our products

and leave us with unsold inventory or missed opportunities If that occurs we may be forced to rely on

markdowns or promotional sales to dispose of excess slow-moving inventory which may harm our business

10

At the same time our focus on the management of inventory may result from time to time in not having an

adequate supply of products to meet consumer demand and cause us to lose sales

We may be unable to execute key strategic initiatives

We continue to take actions to restructure our business operations to maximize operating effectiveness

and efficiency and to reduce costs Achievement of the targeted benefits depends in part on our ability to

identify develop and execute strategies and initiatives appropriately and effectively We cannot assure you that

we will achieve the targeted benefits under these programs within targeted timeframe or within targeted costs

or that the benefits even if achieved will be adequate

We conduct business outside the United States which exposes us to foreign currency import restrictions

taxes duties and other risks

We manufacture and source majority of our products outside the United States Our products are sold in

the U.S and internationally Accordingly we are subject to the risks of doing business abroad including

among other risks foreign currency exchange rate risks import restrictions anti-dumping investigations

political or labor disturbances expropriation and acts of war Additionally as global company our effective

tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations

governing each region The Obama Administration continues to propose legislation that would fundamentally

change how U.S multinational corporations are taxed on their global income It is possible that these or other

changes in the U.S tax laws could increase our U.S income tax liability and adversely affect our profitability

On October 2006 the European Commission imposed definitive duties on leather upper footwear

originating from China and Vietnam and imported into European Member States These duties have been in

effect since then with final 16.5% rate for China sourced footwear and 10% rate for Vietnam sourced

footwear Although the European Commission has informally confirmed that the duties will not be further

extended and therefore will no longer be imposed beginning on April 2011 we will continue to monitor

developments in this case and others like it to the extent they arise

Although we pay for the purchase and manufacture of our products primarily in U.S dollars we are

routinely subject to currency rate movements on non-U.S denominated assets liabilities and income as we sell

goods in local currencies through our foreign subsidiaries We cannot assure you that we will be protected from future changes in foreign currency exchange rates that may impact our financial condition or

performance Currency exchange rate fluctuations could also disrupt the business of the independent manufac

turers that produce our products by making their purchases of raw materials more expensive and more difficult

to finance Foreign currency fluctuations could have an adverse effect on our results of operations and

financial condition

We engage in hedging activities to mitigate the impact of foreign currencies on our financial results see Note to our consolidated financial statements entitled Derivatives in Part II Item of this Annual Report

on Form 10-K Our hedging activities are designed to reduce but cannot and will not eliminate the effects of

foreign currency fluctuations Factors that could impact the effectiveness of our hedging activities include

accuracy of sales forecasts volatility of currency markets and the availability of hedging instruments Because

the hedging activities are designed to reduce volatility they not only reduce the negative impact of stronger

U.S dollar but they also reduce the positive impact of weaker U.S dollar Our future financial results could

be significantly affected by the value of the U.S dollar in relation to the foreign currencies in which we

conduct business The degree to which our financial results are affected for any given time period will depend

in part upon our hedging activities

We depend on independent manufacturers to produce the majority of our products and our business

could suffer if we need to replace manufacturers or suppliers or find additional capacity

During 2010 we manufactured approximately 12% of our footwear unit volume Independent manufac

turers and licensees in Asia Europe Mexico Africa and South and Central America produced the remainder

of our footwear products and all of our apparel and accessories products Independent manufacturers in China

Vietnam Thailand and India produced approximately 88% of our 2010 footwear unit volume Three of these

manufacturing partners together produced approximately 60% of our 2010 footwear volume If manufacturer

11

is unable to manufacture or ship orders of our products in timely manner or to meet our quality standards

for any reason we could miss customer delivery date requirements for those items which could result in

cancellation of orders refusal to accept deliveries or reduction in purchase prices any of which could have

material adverse effect on our financial condition and results of operations We compete with other companies for the production capacity of our manufacturers and import quota capacity Any long-term economic

downturn could cause our suppliers to fail to make and ship orders we placed We cannot assure you that we will be able to maintain current relationships with our current manufacturers or locate additional manufacturers

that can meet our requirements or manufacture on terms that are acceptable to us Any delays interruption or increased costs in the supply of materials or manufacture of our products could have an adverse effect on our

ability to meet customer and consumer demand for our products and consequently have an adverse effect on

our financial condition and results of operations

Further these independent manufacturers agree to comply with code of conduct and other environmen

tal health and safety standards for the benefit of workers However from time to time such manufacturers

may fail to comply with such standards or applicable local law Significant or continuing noncompliance with

such standards and laws by one or more of such manufacturers could harm our reputation and as result have an adverse effect on our business and financial condition

The loss of one or more of our major suppliers for materials may interrupt our supplies

We depend on limited number of key sources for leather our principal material and other proprietary materials used in our products In 2010 seven suppliers provided in the aggregate approximately 80% of our

leather purchases Three of these suppliers provided approximately 50% of our leather purchases in 2010

While historically we have not experienced significant difficulties in obtaining leather or other materials in

quantities sufficient for our operations there have been significant changes in the prices for these materials In

2010 due to increased demand for leather we experienced some capacity constraints Our gross profit margins

are adversely affected to the extent that we cannot increase the selling prices of our products proportionately with increases in the costs of leather and other materials Any significant unanticipated increase or decrease in

the prices of these commodities could materially affect our results of operations Increasing oil-related product

costs such as manufacturing and transportation costs could also adversely impact our gross margins

Our business could be adversely impacted by any disruption to our supply chain

Independent manufacturers manufacture majority of our products outside of our principal sales markets

which requires us to transport our products via third parties over large geographic distances Delays in or

increases in the cost of the manufacture shipment or delivery of our products due to the availability of

materials labor transportation or other factors could adversely impact our financial performance

In addition manufacturing delays or unexpected demand for our products may require us to use faster

but more expensive transportation methods such as aircraft which could adversely affect our profit margins

The cost of fuel is significant component in manufacturing and transportation costs so increases in the price

of oil-related products could adversely affect our profit margins

Additionally if contract manufacturers of our products or other participants in our supply chain

experience difficulty obtaining financing to purchase raw materials or to finance general working capital needs

due to volatility or disruption in the capital and credit markets we may experience delays or non-delivery of

shipments of our products

Our business is dependent upon our customers and their financial health

Our financial success is directly related to the willingness of our wholesale customers to continue to

purchase our products We do not typically have long-term contracts with customers Sales to our customers

are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by the

customers Failure to fill customers orders in timely manner could harm our relationships with our

customers Furthermore if any of our major customers experience significant downturn in its business or

fails to remain committed to our products or brands then these customers may reduce or discontinue purchases from us which could have an adverse effect on our business results of operations and financial condition

12

We sell our products to wholesale customers and extend credit based on an evaluation of each customers

financial condition usually without requiring collateral The financial difficulties of customer could cause us

to stop doing business with that customer or reduce our business with that customer Our inability to collect

from our customers or cessation or reduction of sales to certain customers because of credit concerns could

have an adverse effect on our business results of operations and financial condition

Our products are sold in many international markets through independent licensees franchisees and

distributors Failure by such parties to meet planned annual sales goals could have an adverse effect on our

business results of operations and financial condition and it may be difficult and costly to locate an

acceptable substitute If change in licensees franchisees or distributors becomes necessary we may

experience increased costs as well as substantial disruption and resulting loss of sales and brand equity in

that market

In addition changes in the channels of distribution such as the growth of Internet commerce and the

trend toward the sale of private label products by major retailers could have an adverse effect on our business

results of operations and financial condition

Our business could be impacted by global capital and credit market conditions and resulting declines in

consumer confidence and spending

Volatility and disruption in the global capital and credit markets have led to tightening of business

credit and liquidity contraction of consumer credit business failures higher unemployment and declines in

consumer confidence and spending in the United States and internationally If global economic and financial

market conditions continue to deteriorate or remain weak for an extended period of time the following factors

could have material adverse effect on our business operating results and financial condition slower

consumer spending may result in reduced demand for our products reduced orders from customers for our

products order cancellations lower revenues increased inventories and lower gross margins continued

volatility in the markets and prices for commodities and raw materials we use in our products and in our

supply chain could have material adverse effect on our costs gross margins and profitability if customers

experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to

purchase our products this could result in reduced orders for our products order cancellations inability of

customers to timely meet their payment obligations to us extended payment terms higher accounts receivable

reduced cash flows greater expense associated with collection efforts and increased bad debt expense and if

customers experience severe financial difficulty some may become insolvent and cease business operations

which could reduce the availability of our products to consumers

Our business could be adversely impacted by the financial instability of third parties with which we do

business

Distress in the financial markets has had an adverse impact on the availability of credit and liquidity

resources Continued market deterioration could jeopardize our ability to rely on and benefit from certain

counterparty obligations including those of financial institutions party to our credit agreements and derivative

contracts and those of other parties with which we do business The failure of any of these counterparties to

honor their obligations to us or the continued deterioration of the global economy could have material

adverse effect on our financial condition and results of operations In addition our ability to replace such

credit agreements on the same or similar terms may be limited if market and general economic conditions

continue to deteriorate

We rely significantly on information technology and any failure inadequacy interruption or security

failure of that technology could harm our ability to effectively operate our business

We are heavily dependent on information technology systems including for design production forecast

ing ordering manufacturing transportation sales and distribution Our ability to manage and maintain our

inventory effectively and to ship and sell products to customers on timely basis depends significantly on the

reliability of these systems The failure of these systems to operate effectively problems with transitioning to

upgraded or replacement systems or breach in security of these systems could cause delays in product

13

fulfillment and reduced efficiency of our operations could require significant capital investments to remediate

the problem and may have an adverse effect on our results of operations and financial condition

We are converting certain internally developed and other third-party applications to an integrated enterprise resource planning or ERP information technology system provided by third-party vendors This

multi-year initiative began in the third quarter of 2010 While we believe the implementation of these systems will provide significant opportunity for us to make our business more responsive and efficient such major

undertaking carries various risks and uncertainties that could cause actual results to differ materially These

include changes in the estimated costs and anticipated benefits of strategic business system transforma

tion ii potential disruption to our business and operations as we implement the ERP applications iii the

timing and uncertainty of activities related to software implementation and business transformation iv our

ability to utilize our new information technology systems to execute our strategies successfully and the

additional risk of unforeseen issues interruptions and costs If we are unable to successfully implement this

initiative it may have an adverse effect on our capital resources financial condition and results of operations and liquidity

We depend on sales forecasts which may not be accurate and may result in higher than necessary infrastructure and product investments

We base our investments in infrastructure and product in part on sales forecasts We do business in

highly competitive markets and our business is affected by variety of factors including brand awareness

product innovations retail market conditions economic and other factors changing consumer preferences

fashion trends seasonality and weather conditions One of our principal challenges is to predict these factors

to enable us to match the production of our products with demand If sales forecasts are not achieved these

investments could represent higher percentage of revenue and we may experience higher inventory levels

and associated carrying costs and decreased profit margins if we are forced to dispose of resulting excess or

slow-moving inventory all of which could adversely affect our financial performance

Declines in revenue in our retail stores could adversely affect profitability

We have made significant capital investments in opening retail stores and incur significant expenditures in

operating these stores The higher level of fixed costs related to our retail organization can adversely affect

profitability particularly in the first half of the year as our revenue historically has been more heavily

weighted to the second half of the year Our ability to recover the investment in and expenditures of our retail

organization can be adversely affected if sales at our retail stores are lower than anticipated Our gross margin

could be adierse1y affected if off-price sales increase as percentage of revenue

We rely on our licensing partners to help us preserve the value of our brand

As mentioned in Part Item we have entered into several licensing agreements which enable us to

expand our brand to product categories and geographic territories in which we have not had an appreciable

presence The risks associated with our own products also apply to our licensed products There are also any number of possible risks specific to licensing partners business including for example risks associated with

particular licensing partners ability to obtain capital manage its labor relations maintain relationships with

its suppliers manage its credit risk effectively control quality and maintain relationships with its customers

Although our license agreements prohibit licensing partners from entering into licensing arrangements with

certain of our competitors generally our licensing partners are not precluded from offering under other

brands the types of products covered by their license agreements with us substantial portion of sales of the

licensed products by our domestic licensing partners are also made to our largest customers While we have

significant control over our licensing partners products and advertising we rely on our licensing partners for

among other things operational and financial control over their businesses

The loss of key executives could cause our business to suffer and control by members of the Swartz

family and the anti-takeover effect of multiple classes of stock could discourage attempts to acquire us

Sidney Swartz our Chairman Jeffrey Swartz our President and Chief Executive Officer and other

executives have been key to the success of our business to date The loss or retirement of these or other key

executives could adversely affect us Sidney Swartz Jeffrey Swartz and various trusts established for the

14

benefit of their families or for charitable purposes hold approximately 73.7% of the combined voting power

of our capital stock in the aggregate enabling them to control our affairs Members of the Swartz family will

unless they sell shares of Class common stock that would reduce the number of shares of Class common

stock oætstanding to 12.5% Or less of the total number of shares of Class and Class common stock

outstanding have the ability by virtue of their stock ownership to prevent or cause change in control of the

Company This could discourage an attempt to acquire the Company that might provide stockholders with

premium to the market price of their common shares

Our charter documents and Delaware law may inhibit change of control that stockholders may consider

favorable

Under our Certificate of Incorporation the Board of Directors has the ability to issue and determine the

terms of preferred stock The ability to issue preferred stock coupled with the anti-takeover provisions of

Delaware law could delay or prevent change of control or change in management that might provide

stockholders with premium to the market price of their common stock

Our inability to attract and retain qualified employees could impact our business

We compete for talented employees within our industry We must maintain competitive compensation

packages to recruit and retain qualified employees Our failure to attract and retain qualified employees could

adversely affect the sales design and engineering of our products

Our ability to protect our trademarks and other intellectual property rights may be limited

We believe that our trademarks and other proprietary rights are important to our success and our

competitive position We devote substantial resources to the establishment and protection of our trademarks on

worldwide basis We cannot ensure that the actions we have taken to establish and protect our trademarks

and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others

from seeking to block sales of our products as violation of the trademarks and proprietary rights of others

Also we cannot ensure that others will not assert rights in or ownership of trademarks and other proprietary

rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction We are

also susceptible to injury from parallel trade and counterfeiting of our products In addition the laws of certain

foreign countries including some countries in which we currently do business may not protect proprietary

rights to the same extent as do the laws of the United States

The value of our brand and our sales could be diminished if we are associated with negative publicity

While our staff and third-party compliance auditors periodically visit and monitor the operations of our

vendors independent manufacturers and licensees we do not control these vendors or independent manufac

turers or their labor practices violation of our vendor policies labor laws or other laws including consumer

and product safety laws by us such vendors or independent manufacturers or any inaccuracy with respect to

claims we may make about our business or products including environmental and consumer and product

safety claims could interrupt or otherwise disrupt our sourcing or damage our brand image Negative publicity

for these or other reasons regarding our Company brand or products including licensed products could

adversely affect our reputation and sales

Our business is affected by seasonality which could result in fluctuations in our operating results and

stock price

We experience fluctuations in aggregate sales volume during the year Historically revenue in the second

half of the year has exceeded revenue in the first half of the year However the mix of product sales may vary

considerably from time to time as result of changes in seasonal and geographic demand for particular types

of footwear apparel and accessories As result we may not be able to predict our quarterly sales accurately

Accordingly our results of operations are likely to fluctuate significantly from period to period Results of

operations in any period should not be considered indicative of the results to be expected for any future

period

15

Our success depends on our global distribution facilities

We distribute our products to customers directly from the factory and through distribution centers located

throughout the world Our ability to meet customer expectations manage inventory complete sales and

achieve objectives for operating efficiencies depends on the proper operation of our distribution facilities the

development or expansion of additional distribution capabilities and the timely performance of services by

third parties including those involved in shipping product to and from our distribution facilities Our

distribution facilities could be interrupted by information technology problems and disasters such as

earthquakes severe weather or fires Any significant failure in our distribution facilities could result in an

adverse effect on our business We maintain business interruption insurance but it may not adequately protect us from any adverse effects that could be caused by significant disruptions in our distribution facilities

Our business could be adversely affected by governmental policies and regulation

Our business is affected by changes in government and regulatory policies in the United States and in

other countries Changes in interest rates tax laws duties tariffs and quotas could have negative impact on

our ability to produce and market our products at competitive prices

Our business could be adversely affected by global political and economic uncertainty

Concerns regarding acts of terrorism the wars in Iraq Afghanistan and the Middle East and increasing

tensions between Asian countries among other events have created significant global economic and political uncertainties that may have material and adverse effects on consumer demand foreign sourcing of footwear

shipping and transportation product imports and exports and the sale of products in foreign markets We are

subject to risks in doing business in developing countries and economically and politically volatile areas

Risks Related to Our Industry

We face intense competition in the worldwide footwear and apparel industry which may impact our sales

We face variety of competitive challenges from other domestic and foreign footwear and apparel

producers some of which may be significantly larger and more diversified and have greater financial and

marketing resources than we have We compete with these companies primarily on the basis of anticipating and responding to changing consumer demands in timely manner maintaining favorable brand recognition

developing innovative high-quality products in sizes colors and styles that appeal to consumers providing

strong and effective marketing support creating an acceptable value proposition for retail customers ensuring

product availability and optimizing supply chain efficiencies with manufacturers and retailers and obtaining

sufficient retail floor space and effective presentation of our products at retail Increased competition in the

worldwide footwear and apparel industries including Internet-based competitors could reduce our sales prices

and margins and adversely affect our results of operations

downturn in the economy may affect consumer purchases of discretionary items and retail products

which could adversely affect our sales

The industries in which we operate are cyclical Many factors affect the level of consumer spending in

the footwear and apparel industries including among others general business conditions interest rates the

availability of consumer credit weather taxation and consumer confidence in future economic conditions

Consumer purchases of discretionary items including our products may decline during recessionary periods and also may decline at other times when disposable income is lower downturn in the economies in which

-..1 1.-l- .- .- -.. ..1 -1 T.-A -.-- 11cens1ng aiiu UlI1UULOI paiuiciS WiiLLiii we auwa my

adversely affect our sales Our gross margin could also be adversely affected if off-price sales increase as

percentage of revenue

Retail trends could result in downward pressure on our prices

With the growing trend toward retail trade consolidation we increasingly depend upon reduced number

of key retailers whose bargaining strength is growing Changes in the policies of these retail trade customers

such as increased at-once ordering limitations on access to shelf space and other conditions may result in

16

lower net sales Further consolidations in the retail industry could result in price and other competition that

could damage our business

ITEM lB UNRESOLVED STAFF COMMENTS

None

ITEM PROPERTIES

We lease our worldwide headquarters located in Stratham New Hampshire The lease for this property

expires in December 2020 We consider our headquarters facilities adequate and suitable for our current needs

We lease our manufacturing facilities located in Santiago Dominican Republic under leasing arrange

ments which expire on various dates through 2013 We own our distribution facility in Danville Kentucky

and we lease our facilities in Ontario California and Enschede Netherlands The Company and its subsidiaries

lease all of their specialty factory outlet and footwear plus stores Our subsidiaries also lease office and

warehouse space to meet their individual requirements These stores and office space leases expire on various

dates through 2024

Our headquarters and manufacturing facilities are included in Unallocated Corporate for purposes of

segment reporting Our distribution facilities in the United States are included in our North America segment

Our distribution facility in Enschede is included in our Europe segment Specialty factory outlet and footwear

plus stores are included in each of our North America Europe and Asia segments as are office and warehouse

space

ITEM LEGAL PROCEEDINGS

We are involved in various legal matters including litigation which have arisen in the ordinary course of

business We believe that the ultimate resolution of any existing matter will not have material adverse effect

on our business or our consolidated financial statements

ITEM Removed and Reserved

PART II

ITEM MARKET FOR REGISTRANTS COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class Common Stock is traded on the New York Stock Exchange under the symbol TBL There is

no market for shares of our Class Common Stock however shares of Class Common Stock may be

converted into shares of Class Common Stock on one-for-one basis and will automatically be converted

upon any transfer except for estate planning transfers and transfers approved by the Board of Directors

The following table presents the high and low closing sales prices of our Class Common Stock for the

past two years as reported by the New York Stock Exchange

2010 2009

High Low High Low

First Quarter $21.59 $15.86 $14.05 8.84

Second Quarter 23.26 15.99 16.24 12.28

Third Quarter 19.88 15.15 15.00 12.42

Fourth Quarter 26.42 19.83 18.37 13.31

As of February 10 2011 the number of record holders of our Class Common Stock was 702 and the

number of record holders of our Class Common Stock was The closing sales price of our Class

Common Stock on February 10 2011 was $28.65 per share

We have never declared dividend on either the Companys Class or Class Common Stock Our

ability to pay cash dividends is limited pursuant to loan agreements see Note 10 to our consolidated financial

statements in Part II Item of this Annual Report on Form 10-K The Company has no plans to declare or

pay any dividends at this time

17

Performance Graph

The following graph shows the five year cumulative total return of Class Common Stock as compared with the Standard Poors SP 500 Stock Index and the weighted average of the SP 500 Footwear Index and the SP 500 Apparel Accessories and Luxury Goods Index The total return for the Footwear and Apparel Accessories and Luxury Goods indices is weighted in proportion to the percent of the Companys

revenue derived from sales of footwear and from apparel and accessories excluding royalties on products sold

by licensees respectively for each year

Indexed to December 31 2005

200

150

_-

50

20o5 2006 2007 2008 2009 2010

----Tirvberland --SP 500 Index ----U---- Weighted Average of SOP 500 Footwear Index and

SP 500 Apparel Accessories Luxury Goods Index

Timberland

SP 500 Index Weighted Average of SP 500 Footwear Index and SP 500 Apparel Accessories Luxury Goods Index

20051 2006 2007 2008 2009 2010

100.00 97.02 55.55 35.48 55.08 75.55

100.00 115.79 122.16 76.96 97.33 111.99

100.00 120.77 135.77 106.82 146.94 195.24

18

ISSUER PURCHASES OF EQUITY SECURITIES1

For the Three Fiscal Months Ended December 31 2010

Total Number Maximum Number

of Shares of Shares

Purchased as Part that May Yet Total Number of Publicly Be Purchased

of Shares Average Price Announced Under the Plans

Period Purchased Paid per Share Plans or Programs or Programs

October October 29 3298977

October 30November26 111456 24.61 111456 3187521

November 27 December 31 290084 25.18 290084 2897437 Q4 Total 401540 $25.02 401540

Footnote1

Approved Announcement Program Expiration

Date Size Shares Date

Program 12/09/2009 6000000 None

Fiscal month

Based on trade date not settlement date

No existing programs expired or were terminated during the reporting period See Note 12 to our

consolidated financial statements entitled Stockholders Equity in Item of this Annual Report on

Form 10-K for additional information

ITEM SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with our consolidated financial

statements and related notes included in Part II Item of this Annual Report on Form 10-K

Selected Statement of Income Data

Years Ended December 31 2010 2009 2008 2007 2006

Dollars in thousands except per share data

Revenue $1429484 $1285876 $1364550 $1436451 $1567619

Net income 96622 56644 42906 39999 101205

Earnings per share

Basic 1.84 1.01 0.73 0.65 1.62

Diluted 1.82 1.01 0.73 0.65 1.59

Selected Consolidated Balance Sheet Data

December 31 2010 2009 2008 2007 2006

Dollars in thousands

Cash and equivalents $272221 $289839 $217189 $143274 $181698

Working capital 474502 442530 417829 399122 363143

Total assets 892359 859907 849399 836345 860377

Total long-term debt

Stockholders equity 611511 595617 576538 577160 561685

19

ITEM MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is managements discussion and analysis of the financial condition and results of operations

of The Timberland Company and its subsidiaries we our us its Timberland or the Company as well as our liquidity and capital resources The discussion including known trends and uncertainties

identified by management should be read in conjunction with the consolidated financial statements and related

notes included in this Annual Report on Form 10-K

With respect to the 2010 versus 2009 and 2009 versus 2008 comparisons set forth below we have

included discussions and reconciliations of Total Company Europe and Asia revenue changes to constant

dollar revenue changes Constant dollar revenue changes which exclude the impact of changes in foreign

exchange rates are not performance measures recognized under generally accepted accounting principles in

the United States GAAP The difference between changes in reported revenue the most comparable GAAP measure and constant dollar revenue changes is the impact of foreign currency exchange rate

fluctuations We calculate constant dollar revenue changes by recalculating current year revenue using the

prior years exchange rates and comparing it to prior year revenue reported on GAAP basis We provide constant dollar revenue changes for Total Company Europe and Asia results because we use the measure to

understand the underlying results and trends of the business segments excluding the impact of exchange rate

changes that are not under managements direct control The limitation of this measure is that it excludes

items that have an impact on the Companys revenue This limitation is best addressed by using constant dollar

revenue changes in combination with revenue reported on GAAP basis We have foreign exchange rate risk management program intended to minimize both the positive and negative effects of currency fluctuations

on our reported consolidated results of operations financial position and cash flows The actions we take to

mitigate foreign exchange risk are reflected in cost of goods sold and other net in our consolidated statements

of operations

Overview

Our principal strategic goal is to become the Outdoor Brand on Earth by offering an integrated product

selection that equips consumers to enjoy the experience of being in the outdoors We sell our products to

consumers who embrace an outdoor-inspired lifestyle through high-quality distribution channels including our

own retail stores which reinforce the premium positioning of the Timberland brand

Our ongoing efforts to achieve this goal include enhancing our leadership position in our core

Timberland footwear business through an increased focus on technological innovation and big idea

initiatives like Earthkeepers ii expanding our global apparel and accessories business by leveraging the

brands equity and initiatives through combination of in-house development and licensing arrangements with

trusted partners iii expanding our brands geographically iv driving operational and financial excellence

setting the standard for social and environmental responsibility and vi striving to be an employer of choice

summary of our 2010 financial performance compared to 2009 follows

Revenue increased 11.2% or 11.7% on constant dollar basis to $1429.5 million

Gross margin increased 180 basis points to 48.7%

Operating expenses increased 7.0% to $562.2 million

Operating income increased 73.3% to $134.3 million

Net income increased from $56.6 million to $96.6 million

Diluted earnings per share increased from $1.01 to $1.82

Net cash provided by operating activities decreased from $135.9 million to $87.9 million

Cash at the end of 2010 was $272.2 million with no debt outstanding

We repurchased approximately 4.4 million shares in 2010 for approximately $85.2 million

20

We are undertaking multi-year business system transformation initiative pursuant to which we will

develop and implement an integrated enterprise resource planning or ERP system to better support our business model and further streamline our operations The Company incurred incremental expenses of

approximately $3.5 million during the year ended December 31 2010 related to initiatives in preparation for

this ERI implementation as well as $3.4 million in capital spending primarily software licenses and

hardware related to the project

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our

consolidated financial statements which have been prepared in accordance with accounting principles

generally accepted in the United States of America The preparation of these consolidated financial statements

requires us to make estimates and judgments that affect the reported amounts of assets liabilities revenues

expenses and related disclosure of contingent assets and liabilities On an on-going basis we evaluate our

estimates including those related to sales returns and allowances realization of outstanding accounts

receivable derivatives other contingencies impairment of assets incentive compensation accruals shared-

based compensation and the provision for income taxes We base our estimates on historical experience and on

various other assumptions that we believe to be reasonable under the circumstances the results of which form

the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent

from other sources Historically actual results have not been materially different from our estimates Because

of the uncertainty inherent in these matters actual results could differ from the estimates used in applying our

critical accounting policies Our significant accounting policies are described in Note to the Companys consolidated financial statements appearing in Part II Item of this Annual Report on Form 10-K

We have identified the following as critical accounting policies based on the significant judgments and

estimates used in determining the amounts reported in our consolidated financial statements

Sales Returns and Allowances

Our revenue consists of sales to wholesale customers including distributors and franchisees retail and

e-commerce customers and license fees and royalties We record wholesale and e-commerce revenues when

title passes and the risks and rewards of ownership have passed to our customer based on the terms of sale

Title passes generally upon shipment to or upon receipt by our customer depending on the country of sale and

the agreement with our customer Retail store revenues are recorded at the time of the sale License fees and

royalties are recognized as earned per the terms of our licensing and royalty agreements We also sell gift

cards the revenue from which is recognized at the time of redemption

We record reductions to revenue for estimated wholesale and retail customer returns and allowances in

the same period the related sales are recorded We base our estimates on historical rates of customer returns

and allowances as well as the specific identification of outstanding returns and allowances which are known

to us but which have not yet been received Our total reserves for sales returns and allowances were

$29.3 million and $27.1 million at December 31 2010 arid 2009 respectively The actual amount of customer

returns and allowances may differ from our estimates If we determine that increases or decreases to sales

returns and allowances are appropriate we record either reduction or an increase in sales in the period in

which we make such determination

Allowance for Doubtful Accounts

We make ongoing estimates for losses relating to our allowance for uncollectible accounts receivable

resulting from the potential inability of our customers to make required payments We estimate potential losses

primarily based upon our historical rate of credit losses and our knowledge of the financial condition of our

customers Our allowance for doubtful accounts totaled $10.9 million and $12.2 million at December 31 2010

and 2009 respectively Historically losses have been within our expectations If the financial condition of our

customers were to change we may be required to make adjustments to these estimates If we determine that

increases or decreases to the allowance for doubtful accounts are appropriate we record either an increase or

decrease to selling expense in the period in which we make such determination

21

Derivatives

We are routinely subject to currency rate movements on non-U.S dollar denominated assets liabilities

and cash flows as we purchase and sell goods in foreign markets in their local currencies We use derivative

instruments specifically forward contracts to mitigate the impact of foreign currency fluctuations on portion

of our forecasted foreign currency exposures These derivatives are carried at fair value on our consolidated

balance sheet Changes in fair value of derivatives not designated as hedge instruments are recorded in other

net in our consolidated statements of income see Notes and to our consolidated financial statements in

Part II Item of this Annual Report on Form 10-K For our derivative contracts that have been designated as

hedge instruments the effective portion of gains and losses resulting from changes in the fair value of the

instruments are deferred in accumulated other comprehensive income and reclassified to earnings in cost of

goods sold in the period that the transaction that is subject to the related hedge contract is recognized in

earnings The ineffective portion of the hedge is reported in other net in our consolidated statements of

income We use our operating budget and forecasts to estimate future economic exposure and to determine the

levels and timing of derivative transactions intended to mitigate such exposures in accordance with our risk

management policies We closely monitor our foreign currency exposure and adjust our derivative positions

accordingly Our estimates of anticipated transactions could fluctuate over time and could vary from the

ultimate transactions Future operating results could be impacted by adjustments to these estimates and

changes in foreign currency forward rates

Contingencies

In the ordinary course of business we are involved in legal matters involving contractual and employment

relationships product liabilities trademark rights and variety of other matters We record contingent liabilities when it is probable that liability has been incurred and the amount of the loss can be reasonably

estimated Estimating probable losses requires analysis and judgment about the potential actions Therefore

actual losses in any future period are inherently uncertain We do not believe that any pending legal matters

will have material impact on our consolidated financial statements However if actual or estimated probable future losses exceed our recorded liability we would record additional expense during the period in which the

loss or change in estimate occurred

Goodwill and Indefinite-lived Intangible Assets

The Company evaluates goodwill and indefinite-lived intangible assets for impairment annually at the

end of our second fiscal quarter and when events occur or circumstances change that may reduce the value of

the asset below its carrying amount using forecasts of discounted future cash flows Events or circumstances

that might require an interim evaluation include unexpected adverse business conditions economic factors

technological changes and loss of key personnel Goodwill and indefinite-lived intangible assets totaled

$39.0 million and $32.4 million respectively at December 31 2010 Should the fair value of the Companys

goodwill or indefinite-lived intangible assets decline because of reduced operating performance market

declines or other indicators of impairment or as result of changes in the discount rate charges for

impairment may be necessary The Company recorded an impairment charge of $8.8 million in 2010 related to

goodwill and indefinite-lived intangible assets No impairment of goodwill or indefinite-lived assets occurred

in 2009 or 2008 see Note to our consolidated financial statements in Part II Item of this Annual Report

on Form 10-K

For goodwill the primary valuation technique used is the discounted cash flow analysis based on

managements 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 Estimates of future cash flows

require assumptions related to revenue and operating income growth asset-related expenditures working

capital levels and other factors In addition management uses market-based valuation method involving

analysis of market multiples of revenues and earnings before interest taxes depreciation and amortization for

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 stand-alone basis and this combination is indicative of the factors market

participant would consider when performing similar valuation For trademark intangible assets management

22

uses the relief-from-royalty method in which fair value is the discounted value of forecasted royalty revenue

using royalty rate that an independent third party would pay for use of that trademark

Different assumptions from those made in the Companys analysis could materially affect projected cash

flows and the Companys evaluation of goodwill and indefinite-lived intangible assets for impairment Our

estimates Of fair value are sensitive to changes in the assumptions used in our valuation analyses and as

result actual performance in the near and longer-term could be different from these expectations and

assumptions These differences could be caused by events such as strategic decisions made in response to

economic and competitive conditions and the impact of economic factors on our customer base If our future

actual results are significantly lower than our current operating results or our estimates and assumptions used

to calculate fair value are materially different the value determined using the discounted cash flow analysis

could result in lower value significant decrease in value could result in fair value lower than carrying

value which could result in impairment of our remaining goodwill While we believe we have made

reasonable estimates and assumptions used to calculate the fair value of the reporting units and other

intangible assets it is possible material change could occur which may ultimately result in the recording of

an additional non-cash impairment charge We revise our estimates used in calculating the fair value of our

reporting units as needed

These non-cash impairment charges do not have any direct impact on our liquidity compliance with any

covenants under our debt agreements or potential future results of operations Our historical operating results

may not be indicative of our future operating results

Long-lived Assets

When events or circumstances indicate that the carrying value of long-lived asset may be impaired we

estimate the future undiscounted cash flows to be derived from the asset to determine whether or not

potential impairment exists If the carrying value exceeds the estimate of future undiscounted cash flows

impairment is calculated as the excess of the carrying value of the asset over the estimate of its fair market

value We estimate future undiscounted cash flows using assumptions about expected future operating

performance Those estimates of undiscounted cash flows could differ from actual cash flows due to among other things economic conditions changes to business operations or technological change In 2010 and 2009

an impairment of $1.0 million and $3.0 million respectively was recorded related to the carrying value of

certain fixed assets see Note to our consolidated financial statements in Part II Item of this Annual

Report on Form 10-K In 2010 2009 and 2008 an impairment of $5.1 million $0.9 million and $2.1 million

respectively related to the carrying value of intangible assets was recorded see Note to our consolidated

financial statements in Part II Item of this Annual Report on Form 10-K

Incentive Compensation Accruals

We use incentive compensation plans to link compensation to the achievement of specific annual

performance targets We accrue for this liability during each year based on certain estimates and assumptions The amount paid based on actual performance could differ from our accrual

Share-based Compensation

The Company estimates the fair value of its stock option awards and employee stock purchase plan the

ESPP rights on the date of grant using the Black-Scholes option valuation model The Black-Scholes model includes various assumptions including the expected volatility for stock options and ESPP rights and the

expected term of stock options These assumptions reflect the Companys best estimates but they involve

inherent uncertainties based on market conditions generally outside of the Companys control Additionally

we make certain estimates about the number of options and shares which will be awarded under performance

based incentive plans As result if other assumptions or estimates had been used share-based compensation

expense could have been materially impacted Furthermore if the Company uses different assumptions in

future periods share-based compensation expense could be materially impacted in future periods See Note 13

to our consolidated financial statements in Part II Item of this Annual Report on Form 10-K for additional

information regarding the Companys share-based compensation

23

Income Taxes

We record deferred tax assets and liabilities based upon temporary book to tax differences and to

recognize tax attributes such as tax loss carryforwards and credits The carrying value of our net deferred tax

assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions to

realize the value of these assets If we were unable to generate sufficient future taxable income in these

jurisdictions an adjustment could be required in the net carrying value of the deferred tax assets which would

result in additional income tax expense in our consolidated statements of income Management evaluates the

realizability of the deferred tax assets and assesses the need for any valuation allowance quarterly

We estimate the effective tax rate for the full fiscal year and record quarterly income tax provision in

accordance with the anticipated annual rate As the fiscal year progresses the estimate is refined based upon

actual events and eamings by jurisdiction during the year This continual estimation process periodically

results in change to the expected effective tax rate for the fiscal year When this occurs we adjust the

income tax provision during the quarter in which the change in estimate occurs so that the year-to-date

provision reflects the expected annual rate

The Company recognizes the impact of tax position in our financial statements if that position is more

likely than not to be sustained upon examination by the appropriate taxing authority based on its technical

merits We exercise our judgment in determining whether position meets the more likely than not threshold

for recognition based on the individual facts and circumstances of that position in light of all available

evidence In measuring the liability we consider amounts and probabilities of outcomes that could be realized

upon settlement with taxing authorities using the facts circumstances and information available at the balance

sheet date These reflect the Companys bestestimates but they involve inherent uncertainties As result if

new information becomes available the Companys judgments and estimates may change change in

judgment relating to tax position taken in prior annual period will be recognized as discrete item in the

period in which the change occurs change in judgment relating to tax position taken in prior interim

period within the same fiscal year will be reflected through our effective tax rate

Results of Operations

Years Ended December 31 2010 2009 2008

Amounts in thousands except per share data

Revenue $1429484 100.0% $1285876 100.0% $1364550 100.0%

Gross profit 696514 48.7 602922 46.9 620733 45.5

Operating expense 562230 39.3 525448 4ft9 551097 40.4

Operating income 134284 9.4 77474 6.0 69636 5.1

Interest income/expense net 104 405 1719 0.1

Other net 7080 0.5 3506 0.3 5455 0.4

Net income 96622 6.8 56644 4.4 42906 3.1

Earnings per share

Basic 1.84 1.01 0.73

Diluted 1.82 1.01 0.73

Weighted-average shares

outstanding

Basic 52498 56034 58442

-1 %CA LJIluLeu JZYYU JOJJ

2010 Compared to 2009

Revenue

Our consolidated revenues grew 11.2% to $1429.5 million in 2010 reflecting growth in every major

market across Europe Asia and North America The impact of changes in foreign exchange rates did not

have material impact on consolidated revenues North America revenue totaled $647.3 million 6.1%

increase from 2009 Europe revenues were $592.1 million for 2010 an increase of 12.1% from 2009 and up

24

15.7% on constant dollar basis Asia revenues were $190.1 million for 2010 an increase of 28.7% from

2009 and up 22.0% on constant dollar basis

Products

Worldwide footwear revenue was $1035.7 million for 2010 an increase of $104.5 million or 11.2%

from 2009 driven by sales of mens footwear in Europe North America and Asia as well as womens and

kids footwear in Europe and Timberland PRO product in North America Worldwide apparel and accessories revenue grew 12.1% to $368.8 million reflecting strong growth in Timberland apparel sales in Asia and

SmartWool apparel and accessories in North America Royalty and other revenue decreased slightly in 2010

to $25.0 million

Channels

Wholesale revenue was $1024.7 million in 2010 an 11.5% increase compared to 2009 reflecting growth

in footwear in Europe North America and Asia and apparel and accessories in North America Retail revenues

grew 10.3% to $404.8 million driven by comparable store sales growth the net addition of 10 stores and

favorable foreign exchange rate impacts in Asia Global retail comparable store sales were up 8.8% compared

to 2009 with growth in both our specialty and outlet stores in each of our geographic regions We had 228

Company-owned stores shops and outlets worldwide at the end of 2010 compared to 218 at December 31

2009

Gross Profit

Gross profit as percentage of sales or gross margin was 48.7% in 2010 180 basis point improvement

compared to 46.9% in 2009 The gross margin expansion was driven by favorable region channel and product

mix fewer and more profitable close-out sales and better pricing in part due to less promotional activity in

retail which more than offset margin pressure from higher product costs While the benefits from mix may continue we expect that increased product costs as result of higher leather transportation and labor costs

will adversely impact gross margin through 2011

Operating Expense

Total operating expense was $562.2 million in 2010 $36.8 million or 7.0% higher than 2009 The change is attribUtable to $19.4 million increase in selling expenseand an increase in general and administrative costs

of $7.1 million partially offset by $3.0 million gain related to the termination of certain licensing

agreements in 2010 Operating expense in 2010 and 2009 also included impairment charges of $13.9 million

and $0.9 million respectively related to goodwill and intangible assets Overall changes in foreign exchange

rates reduced operating expense by approximately $3.2 million in 2010

Selling expense for 2010 was $427.4 million an increase of $19.4 million or 4.8% compared to the

prior year This increase was driven by increases of $7.9 million in variable selling-related costs such as agent

fees shipping costs and sales incentives $7.4 million in investments in key strategic advertising and branding

initiatives including the launch of new website and micro-sites $3.6 million in rent and occupancy costs for

store expansion in Asia and Europe and $2.2 million in incentive compensation and other employee related

costs These increases were partially offset by reduction of $1.5 million associated with the write-off of

certain fixed assets related to our retail business Selling expense as percentage of revenue was 29.9% in

2010 compared to 1.7% in 2009

We include the costs of physically managing inventory warehousing and handling costs in selling

expense These costs totaled $36.4 million and $37.4 million in 2010 and 2009 respectively

Advertising expense which is included in selling expense was $47.1 million and $40.7 million in 2010

and 2009 respectively Increased investment in brand-focused consumer-facing marketing programs such as

Internet and other digital and social media initiatives as well as magazine campaigns was partially offset by

lower levels of television advertising and related media production costs Our commitment to strengthen our

premium brand position through consumer-facing advertising initiatives remains key to driving our strategy

forward

25

General and administrative expense was $123.9 million an increase of 6.1% over the $116.8 million

recorded in 2009 driven by increases in incentive compensation and other employee related costs of

$5.0 million as well as $3.5 million in incremental costs related to business system transformation initiatives

in preparation for multi-year ERP system implementation These increases were partially offset by decrease

in government taxes on certain foreign investments

Total operating expense in 2010 included an impairment charge of $8.5 million related to certain

intangible assets an impairment charge of $5.4 million reLated to goodwill and gains of $3.0 million

associated with the termination of certain licensing agreements Total operating expense in 2009 included

charge of $0.9 million to reflect the impairment of trademark See Notes and to the consolidated

financial statements included in Part II Item of this Annual Report on Form 10-K for additional

information

Operating Income

Operating income was $134.3 million in 2010 compared to operating income of $77.5 million in 2009

Operating income in 2010 included goodwill and intangible asset impairment charge of $13.9 million and

gains on termination of certain licensing agreements of $3.0 million compared to $0.9 million intangible

asset impairment charge included in operating income in 2009

Other Income/Expense and Taxes

Interest income was $0.4 million and $0.9 million in 2010 and 2009 respectively reflecting lower interest

rates Interest expense which is comprised of fees related to the establishment and maintenance of our

revolving credit facility and bank guarantees was $0.5 million in both 2010 and 2009

Other net included $5.5 million and $1.5 million of foreign exchange gains for 2010 and 2009

respectively reflecting changes in the fair value of financial derivatives specifically forward contracts not

designated as cash flow hedges and currency gains and losses associated with foreign currency denominated

receivables and payables These results were driven by the volatility of exchange rates during the respective

reporting periods and should not be considered indicative of expected future results

Our effective tax rate was 1.6% in 2010 compared to 30.4% in 2009 The 2010 rate was impacted by

the release of approximately $4.4 million in tax accruals as result of final approval associated with tax

clearance for certain closed foreign operations as well as the lapse of certain statutes of limitation The 2009

rate was impacted by tax benefit of approximately $7.3 million due to the closure of audits or lapsing of

certain statutes of limitation in 2009

In December 2009 we received Notice of Assessment from the Internal Revenue Department of

Hong Kong for approximately $17.6 million with respect to the tax years 2004 through 2008 In connection

with the assessment the Company made required payments to the Internal Revenue Department of Hong Kong

totaling approximately $8.4 million in 2010 These payments are included in prepaid taxes on our consolidated

balance sheet We believe we have sound defense to the proposed adjustment and will continue to firmly

oppose the assessment We believe that the assessment does not impact the level of liabilities for our income

tax contingencies However actual resolution may differ from our current estimates and such differences

could have material impact on our future effective tax rate and our results of operations See Note 11 to our

consolidated financial statements in Part II Item of this Annual Report on Form 10-K

2009 Compared to 2008

Revenue

Consolidated revenue for 2009 was $1285.9 million decrease of $78.7 million or 5.8% compared to

2008 These results were driven primarily by declines in Timberland footwear in North America and apparel

worldwide and the strengthening of the U.S dollar against the British Pound and the Euro versus the prior

year partially offset by strong growth in footwear internationally as well as SmartWool products On

constant dollar basis consolidated revenues were down 3.6% North America revenue totaled $610.2 million

6.5% decline from 2008 Europe revenues were $528.0 million for 2009 decrease of 4.3% from 2008 but

up 2.0% on constant dollar basis Asia revenues were $147.7 million for 2009 decrease of 7.9% from

2008 and decline of 11.8% on constant dollar basis

26

Products

Worldwide footwear revenue was $931.2 million for 2009 down $43.1 million or 4.4% from 2008 driven by declines in our mens and womens business in North America Internationally we continued to see

signs of our mens business strengthening in Europe and Asia Worldwide apparel and accessories revenue fell

10.3% to $329.1 million as growth from SmartWool was offset by decline in Timberland brand apparel

and accessories reflecting softness in international markets the strengthening of the U.S dollar relative to the

British Pound and the Euro and to lesser extent the impact of transitioning our North America wholesale

mens apparel business to licensing arrangement The Company ceased sales of in-house Timberland brand

apparel in North America through the wholesale channel during the second quarter of 2008 Royalty and other

revenue increased 10.5% in 2009 to $25.6 million reflecting increased sales of apparel in North America

under our licensing agreement established in 2008

Channels

Wholesale revenue was $918.8 million 7.1% decrease compared to 2008 Softness in the North America

and Asia markets the strengthening of the U.S dollar relative to the British Pound and Euro and to lesser

degree the transition of our North America wholesale mens apparel business to licensing arrangement drove

the year over year wholesale decline

Retail revenues fell 2.1% to $367.1 million driven by unfavorable foreign exchange rate impacts and

challenging retail market in North America Overall global comparable store sales were down 2.4% compared to 2008 with favorable comparable store results in Europe offset by declines in our North America and Asia

stores We had 218 Company-owned stores shops and outlets worldwide at the end of 2009 compared to 219

at December 31 2008

Gross Profit

Gross profit as percentage of sales or gross margin was 46.9% in 2009 compared to 45.5% in 2008

The improvement in gross margin reflects favorable channel and pricing mix within our operating segments

as well as lower sales returns and allowances partially offset by strengthening of the U.S dollar relative to the

British Pound and Euro and lower margins on close-out sales On consolidated basis higher product costs

were offset by favorable purchase price and other manufacturing variances as well as savings from sourcing

cost initiatives

Operating Expense

Total operating expense was $525.4 million in 2009 $25.6 million or 4.7% lower than 2008 The change is attributable to $29.7 million decrease in selling expense and $1.2 million decrease in restructuring

charges partially offset by an increase in general and administrative costs of $3.8 million Operating expense

in 2009 and 2008 also included an impairment charge of $0.9 million and $2.1 million respectively related to

an intangible asset Operating expense in 2008 was favorably impacted by $2.6 million litigation settlement

Overall changes in foreign exchange rates reduced operating expense by approximately $13.9 million in 2009

Selling expense for 2009 was $408.0 million decrease of $29.7 million or 6.8% compared to the prior

year This decline was driven by $20.7 million reduction in sales marketing and distribution expenses due in part to the strengthening of the U.S dollar relative to the Euro and British Pound lower distribution costs and decrease in provisions for bad debts Additionally we had an $8.8 million reduction in retail expenses primarily as result of the closure of certain underperforming stores in Asia and the benefit of foreign

exchange impacts in Europe and $4.3 million reduction in discretionary spending These savings were

partially offset by an increase of $3.2 million in incentive-based compensation costs due to the achievement of

certain performance targets in 2009 and $1.7 million associated with the write-off of certain fixed assets

related to our retail business

We include the costs of physically managing inventory warehousing and handling costs in selling

expense These costs totaled $37.4 million and $41.3 million in 2009 and 2008 respectively

Advertising expense which is included in selling expense was $40.7 million and $43.1 million in 2009

and 2008 respectively We maintained our commitment to strengthening our premium brand position despite

27

adverse economic conditions during 2009 Increased investment in consumer-facing marketing programs such

as Internet and other digital and social media initiatives was offset by lower levels of co-op advertising as well

as television and magazine advertising Television advertising in 2008 included global campaign which

coincided with the summer Olympics

General and administrative expense was $116.8 million an increase of 3.3% over the $113.0 million

recorded in 2008 Increases in employee-related costs of $6.5 million including higher incentive-based

compensation costs as well as employee benefit-related costs were partially offset by reduction of

$2.5 million in discretionary spending

Total operating expense in 2009 included charge of $0.9 million to reflect the impairment of

trademark compared to $2.1 million in 2008 of which $1.9 million was recorded in the fourth quarter of

2008 Operating expense in 2008 was also reduced by $2.6 million favorable legal settlement recorded in the

fourth quarter of 2008

We recorded net restructuring credits of $0.2 million in 2009 compared to charges of $0.9 million in

2008 Credits in 2009 reflect the completion of our 2007 restructuring programs Charges in 2008 reflect

incremental costs associated with the execution of restructuring programs initiated in 2007 to close certain

underperforming retail locations and streamline our global operations

Operating Income

Operating income was $77.5 million in 2009 compared to $69.6 million in 2008 Operating income in

2009 and 2008 included an intangible asset impairment charge of $0.9 million and $2.1 million respectively

and restructuring charges/credits of $0.2 million and $0.9 million respectively Operating income in 2008

also included the benefit of $2.6 million favorable legal settlement

Other Income/Expense and Taxes

Interest income was $0.9 million and $2.4 million in 2009 and 2008 respectively as an increase in

average cash balances was more than offset by lower interest rates Interest exjense which is comprised of

fees related to the establishment and maintenance of our revolving credit facility and bank guarantees and

interest paid on short-term borrowings was $0.5 million and $0.7 million in 2009 and 2008 respectively The

reduction in expense was driven by lower borrowings throughout the year

Other net included $1.5 million and $5.8 million of foreign exchange gains for 2009 and 2008

respectively reflecting changes in the fair value of financial derivatives specifically forward contracts not

designated as cash flow hedges and currency gains and losses associated with foreign currency denominated

receivables and payables These results were driven by the volatility of exchange rates during the respective

reporting periods and should not be considered indicative of expected future results

The effective tax rate was 0.4% in 2009 compared to 44.1% in 2008 The 2009 rate was impacted by

tax benefit of approximately $7.3 million due to the closure of audits or lapsing of certain statutes of limitation

in 2009

Segments Review

We have three business segments see Note 14 to our consolidated financial statements in Part II Item

of this Annual Report on Form 10-K North America Europe and Asia

Revenue by segment for each of the last three years ended December 31 is as follows dollars in

millions

Percentage

For the Years Ended December 31 Change

2010 2009 2008 2010 2009

North America 647.3 610.2 652.4 6.1% 6.5%

Europe 592.1 528.0 551.7 12.1 4.3

Asia 190.1 147.7 160.4 28.7 7.9

$1429.5 $1285.9 $1364.5 11.2 5.8

28

Operating income/loss by segment and as percentage of segment revenue for each of the last three

years ended December 31 are included in the table below dollars in millions Segment operating income is

presented as percentage of its respective segment revenue Unallocated corporate expenses are presented as

percentage of total revenue Unallocated Corporate includes certain value chain costs such as sourcing and

logistics as well as inventory variances and standard cost adjustments which are not allocated back to the

geographic segments North America includes impairment charges of $8.6 million and gain related to the

termination of certain licensing agreements of $3.0 million in the year ended December 31 2010 Europe includes impairment charges of $5.3 million and $0.9 million in the years ended December 31 2010 and

2009 respectively

For the Years Ended December 31

2010 2009 2008

North America 126.3 19.5% 95.7 15.7% 104.2 16.0%

Europe 106.3 18.0 73.8 14.0 83.0 15.1

Asia 30.6 16.1 11.0 7.5 3.2 2.0

Unallocated Corporate 128.9 9.0 103.0 8.0 120.8 8.9

134.3 9.4 77.5 6.0 69.6 5.1

The number of Company-owned retail stores at December 31 2010 2009 and 2008 by segment is as

follows

2010 2009 2008

North America 66 69 71

Europe 66 63 54

Asia 96 86 94

Total 228 218 219

North America

North America revenues increased 6.1% to $647.3 million in 2010 driven by the wholesale business which reflects growth in first quality revenue and strong sell-in of Fall 2010 product partially offset by

decline in off-price revenue Our Timberland PRO footwear line and SmartWool apparel and accessories delivered strong year-over-year growth complemented by mid single-digit growth in our Timberland brand

mens footwear Within North America our retail business grew 2.2% as 3.1% increase in comparable store

sales was partially offset by the net closure of stores

The Companys North America revenue decreased 6.5% to $610.2 million in 2009 driven by softness in

our wholesale business where we saw declines in mens footwear as well as Timberland apparel due in part to anticipated declines from the decision in 2008 to transition our North America wholesale mens apparel business to licensing arrangement The decline in these areas was partially offset by growth in performance

footwear and SmartWool accessories Within North America our retail business had revenue declines of

4.9% driven by an 8.7% decrease in comparable store sales principally related to our outlet stores partially offset by growth in our e-commerce business

Operating income for our North America segment was $126.3 million in 2010 an increase of 31.9%

compared to $95.7 million for 2009 The increase was driven by higher gross profit from 6.1% revenue

growth as well as fewer and more profitable closeout sales less promotional activity in retail and favorable

mix impacts Operating expenses increased 8.0% reflecting goodwill and intangible asset impairment charges

of $8.6 million increases in certain selling related costs of $4.8 million and planned investments in key

strategic marketing initiatives of $3.2 million These items were partially offset by gain of $3.0 million

associated with the termination of certain licensing agreements and reduction of $1.5 million associated with

fixed asset write-offs taken in 2009 related to our a-commerce business and underperforining retail stores

Operating income for our North America segment decreased 8.2% to $95.7 million in 2009 driven by an

8.5% decline in gross margin partially offset by an 8.7% reduction in operating expenses The decrease in

29

gross profit was primarily driven by revenue declines of 6.5% which were partially offset by favorable pricing

and channel mix The lower operating expenses were principally result of decrease in selling and

distribution expenses of $10.8 million reflecting lower volume related costs as well as savings from our cost

reduction and efficiency initiatives $4.2 million decline in employee-related costs resulting from reduced

headcount and severance associated with streamlining our operations in 2008 and $1.6 million decrease in

discretionary spending Write-offs of certain fixed assets related to our retail business offset savings associated

with the exiting of certain specialty brands in 2008

Europe

Europe revenues increased to $592.1 million in 2010 which was 12.1% increase from 2009 and an

increase of 15.7% on constant dollar basis We recorded double-digit growth across nearly all our major markets in Europe in particular Scandinavia and Central and Southern Europe The increases were driven by

strong growth in footwear sales through both the wholesale and retail channels Strength in retail apparel and

accessories was partially offset by wholesale apparel revenue declines Retail growth of 10.6% was driven by

comparable store sales growth of 11.8% and the net addition of stores which more than offset pressure from

unfavorable foreign exchange rate changes

Our Europe revenues decreased to $528.0 million in 2009 from the $551.7 million reported in 2008 due

to foreign exchange rate impacts Europe revenues increased 2.0% on constant dollar basis Strong growth in

our retail business where we experienced comparable store sales growth of 6.7% as well as the net addition of

stores offset softness in wholesale sales primarily in the UK Spain and our distributor markets

Europes operating income was $106.3 million in 2010 compared to $73.8 million in 2009 Improvement

in Europe was driven by revenue growth of 12.1% and favorable channel mix partially offset by unfavorable

foreign exchange rate impacts Operating expenses increased 3.1% year over year as the impact of

$5.3 million impairment charge and increases in marketing and rent and occupancy costs associated with store

expansion were partially offset by favorable foreign exchange rate impacts and decrease in government taxes

on certain foreign investments Operating expense for the 2009 period included charge of $0.9 million for

the impairment of the GoLite trademark

Europes operating income was $73.8 million in 2009 compared to $83.0 million in 2008 reflecting an

8.4% decline in gross profit

which was driven by the impact of foreign exchange rate fluctuations and reduced

margin on close-outs partially offset by favorable channel and product mix This decrease was partially offset

by 7.3% decrease in operating expenses reflecting the impact of foreign exchange rate movements

decrease in sales marketing and distribution costs including decrease in provisions for bad debt lower

discretionary spending and the impact of lower intangible asset write-off in 2009 as compared to 2008 were

substantially offset by increased rent occupancy and compensation costs associated with additional stores

government taxes on certain foreign investments and higher compensation costs

Asia

In Asia revenues increased 28.7% or 22.0% in constant dollars to $190.1 million in 2010 as nearly

every brand category channel and country delivered growth Wholesale growth driven by mens footwear

was strongest in Japan and China Retail revenues were up 26.2% driven by comparable store sales growth of

14.6% the net addition of 10 stores and favorable foreign exchange rate impacts

Asia revenues for 2009 were $147.7 million compared to $160.4 million for 2008 decline of 7.9% or

11.8% in constant dollars due to softness in both our retail and wholesale businesses The retail declines were

due to decreases in comparable store sales of 2.2% combined with the net closure of stores while wholesale

markets continued to be soft in Hong Kong and the distributor businesses

Asia had operating income of $30.6 million for 2010 compared to $11.0 million for 2009 driven by

improvement in gross profit reflecting 28.7% increase in revenue as well as favorable foreign exchange rate

and mix impacts These benefits were partially offset by an increase of 13.7% in operating expenses The

increase in expense was driven primarily by higher marketing and rent and occupancy costs as well as

unfavorable foreign exchange rate impacts

30

Asias operating income was $11.0 million in 2009 compared to $3.2 million in 2008 driven by 12.1%

reduction in operating expenses due principally to lower costs in our retail business of $6.3 million resulting

from the closure of certain underperforming stores and $2.2 million in reduced distribution and marketing

costs due to lower volume and the absence of major television campaign in 2009

Unallocated Corporate

Our Unallocated Corporate expenses increased 25.1% to $128.9 million in 2010 Unallocated Corporate

expenses include central support and administrative costs as well as supply chain costs including sourcing

and logistics inventory cost variances and adjustments to standard costs which are not allocated to our

reportable business segments The increased expense reflects unfavorability in certain supply chain costs

primarily inventory cost variances as well as higher incentive compensation and other employee related costs

of $4.8 million and incremental costs related to multi-year ERP system implementation of $3.5 million

Our Unallocated Corporate expenses which include central support and administrative costs not allocated

to our business segments decreased 14.8% to $103.0 million in 2009 The lower expenses reflect favorable

variances from standard costs sourcing cost initiatives and other cost variances These items are not allocated

to the Companys reportable segments Corporate operating expenses increased 15.2% due to an increase in

employee-related costs primarily incentive-based compensation costs of $4.7 million and certain employee-

related benefits marketing costs of $1.3 million and the impact of favorable legal settlement of $2.6 million

reported in 2008

Reconciliation of Total Company Europe and Asia Revenue Changes to Constant Dollar Revenue

Changes

For the Year Ended For the Year Ended

December 31 2010 December 31 2009

Change Change

in millions Change in millions Change

Total Company

Revenue increase/decrease GAAP $143.6 11.2% $78.7 5.8% Decrease due to foreign exchange rate changes 7.0 0.5% 29.5 2.2%

Revenue increase/decrease in constant dollars $150.6 11.7% $49.2 3.6%

Europe

Revenue increase/decrease GAAP 64.1 12.1% $23.8 43% Decrease due to foreign exchange rate changes 18.8 3.6% 34.7 6.3%

Revenue increase in constant dollars 82.9 15.7% 10.9 2.0%

Asia

Revenue increase/decrease GAAP 42.3 28.7% $12.6 7.9% Increase due to foreign exchange rate changes 9.9 6.7% 6.3 3.9%

Revenue increase/decrease in constant dollars 32.4 22.0% $18.9 11.8%

The difference between changes in reported revenue the most comparable OAAP measure and constant

dollar revenue changes is the impact of foreign currency We calculate constant dollar revenue changes by

recalculating current year revenue using the prior years exchange rates and comparing it to prior year revenue

reported on GAAP basis We provide constant dollar revenue changes for Total Company Europe and Asia

results because we use the measure to understand the underlying results and trends of the business segments

excluding the impact of exchange rate changes that are not under managements direct control We have

foreign exchange rate risk management program intended to minimize both the positive and negative effects of

currency fluctuations on our reported consolidated results of operations financial position and cash flows The

actions we take to mitigate foreign exchange risk are reflected in cost of goods sold and other net

31

Accounts Receivable and Inventory

Accounts receivable were $188.3 million as of December 31 2010 compared to $149.2 million as of

December 31 2009 and $168.7 million as of December 31 2008 Accounts receivable increased 26.2%

compared to 2009 on 26.7% increase in revenue in the fourth quarter combined with timing of shipments in

the quarter Days sales outstanding were 35 days as of December 31 2010 and 2009 and 39 days as of

December 31 2008 Wholesale days sales outstanding were 44 days 45 days and 48 days at the end of 2010

2009 and 2008 respectively We continue to maintain our strong collection discipline and focus on working capital management

Inventory increased 13.6% to $180.1 million as of December 31 2010 from $158.5 million as of

December 31 2009 and $179.7 million as of December 31 2008 The increase in 2010 compared to 2009

reflects higher product costs strong revenue growth and prospects for the business going into 2011 Despite the increase in inventory our level of excess inventory declined as percentage of inventory at December 31 2010 compared to December 31 2009 The decrease in 2009 was attributable to improved demand planning

against lower revenue resulting in reduced excess inventory creation

Liquidity and Capital Resources

2010 Compared to 2009

Net cash provided by operations for 2010 was $87.9 million compared with $135.9 million in 2009

Despite strong improvement in profitability after taking into account non-cash impairments totaling

$14.9 million we saw decrease in cash provided in 2010 compared with 2009 primarily due to an increased

investment in inventory and higher accounts receivable Inventory grew to support our expected growth and

reflects higher product costs compared to 2009 The increase in accounts receivable was driven by our

significant revenue growth in the fourth quarter and timing of shipments Accounts payable was source of

cash in 2010 versus use of cash in 2009 due in part to the timing of inventory purchases Overall in 2010

we invested $61.5 million in operating assets and liabilities compared to generating $40.1 million from them

in 2009

Net cash used for investing activities amounted to $20.6 million in 2010 compared with $20.1 million in

2009 Net cash used for investing activities in 2009 included approximately $1.5 million paid in connection

with the acquisition of Glaudio Capital expenditures in 2010 were $19.9 million compared to $17.7 million

in 2009 The increase in capital expenditures is due primarily to investments in hardware and software

associated with our business system transformation initiative

Net cash used for financing activities was $81.0 million in 2010 compared with $43.1 million in 2009

Cash flows from financing activities reflected share repurchases of $85.2 million in 2010 compared with

$43.9 million in 2009 We received cash inflows of $4.4 million in 2010 frOm the issuance of common stock

related to the exercise of employee stock options and employee stock purchases compared with $2.0 million

in 2009

2009 Compared to 2008

Net cash provided by operations for 2009 was $135.9 million compared with $147.7 million in 2008

The decrease in cash provided in 2009 compared with 2008 was primarily due to the timing of inventory

payments in 2008 partially offset by an increase in incentive compensation accruals We also continued our focus on balance sheet management through the collection of accounts receivable and improved inventory

UO .- .1 ACI -..-. ..-.A 1l1- .- ..-.-. .. .1 .- 11 panning 1n we generaeu .4 iIlliiflJIl ijum raLIn aei aiiu nauiiiiiC uiiipaieu .1 iTniiiOii in 2008

Net cash used for investing activities amounted to $20.1 million in 2009 compared with $21.2 million in

2008 Net cash used for investing activities in 2009 included approximately $1.5 million paid in connection

with the acquisition of Glaudio while 2008 included approximately $1.0 million of cash received as

purchase price adjustment related to the IPATH acquisition in 2007 Capital expenditures in 2009 were

$17.7 million compared to $22.3 million in 2008 The decrease was primarily attributable to reduced retail

store investment in Europe and Asia

32

Net cash used for financing activities was $43.1 million in 2009 compared with $44.2 million in 2008

Cash flows from financing activities reflected share repurchases of $43.9 million in 2009 compared with

$46.3 million in 2008 We received cash inflows of $2.0 million in 2009 from the issuance of common stock

related to the exercise of employee stock options and employee stock purchases compared with $1.9 million

in 2008

Credit Risks

We are exposed to the credit risk of those with whom we do business including counterparties on our derivative contracts and our customers Derivative instruments expose us to credit and market risk The market

risk associated with these instruments resulting from currency exchange movements is expected to offset the

market risk of the underlying transactions being hedged As matter of policy we only enter into derivative

contracts with counterparties having minimum investment-grade or better credit rating Credit risk is

managed through the continuous monitoring of exposures to such counterparties We do not believe there is

significant risk of loss in the event of non-performance by the counterparties associated with these instruments

because these transactions are executed with group of major financial institutions and have varying maturities

through January 2011

Additionally consumer spending is being affected by the current macro-economic environment particu

larly the disruption of the credit and stock markets Continued deterioration or lack of improvement in the

markets could adversely impact our customers and their ability to access credit

We may utilize our committed and uncommitted lines of credit to fund our seasonal working capital needs We have not experienced any restrictions on the availability of these lines and the adverse capital and

credit market conditions are not expected to significantly affect our ability to meet our liquidity needs

Credit Facilities

We have an unsecured committed revolving credit agreement referred to as the Credit Agreement with

group of banks which matures on June 2011 The Credit Agreement provides for $200 million of committed

borrowings of which up to $125 million may be used for letters of credit Any letters of credit outstanding

under the Credit Agreement $1.6 million at December 31 2010 reduce the amount available for borrowing

under the Credit Agreement Upon approval of the bank group we may increase the committed borrowing

limit by $100 million for total commitment of $300 million Under the terms of the Credit Agreement we

may borrow at interest rates based on Eurodollar rates approximately 0.3% at December 31 2010 plus an

applicable margin of between 13.5 and 47.5 basis points based on fixed charge coverage grid that is

adjusted quarterly As of December 31 2010 the applicable margin under the facility was 47.5 basis points We will pay utilization fee of an additional basis points if our outstanding borrowings under the facility exceed $100 million We also pay commitment fee of 6.5 to 15 basis points per annum on the total

commitment based on fixed charge coverage grid that is adjusted quarterly As of December 31 2010 the

commitment fee was 15 basis points The Credit Agreement places certain limitations on additional debt stock

repurchases acquisitions and the amount of dividends we may pay and includes certain other financial and

non-financial covenants The primary financial covenants relate to maintaining minimum fixed charge

coverage ratio of 2.251 and maximum leverage ratio of 21 We measure compliance with the financial and

non-financial covenants and ratios as required by the terms of the Credit Agreement on fiscal quarter basis

and were in compliance for the quarter ended December 31 2010 The continued volatility in the credit

markets could result in significant increases in borrowing costs for any new facility we may require Our

ability to obtain new financing with comparable terms upon the maturity of our existing facility will depend

upon prevailing market conditions our financial condition and the terms and conditions available at the time

of such financing

We had uncommitted lines of credit available from certain banks totaling $30 million as of December 31 2010 Any borrowings under these lines would be at prevailing money market rates Further we had an

uncommitted letter of credit facility of $80 million to support inventory purchases These arrangements may be terminated at any time at the option of the banks or at our option

As of December 31 2010 and 2009 we had no borrowings outstanding under any of our credit facilities

We did not utilize our borrowing capability under the facilities at any point during 2010 and 2009

33

Management believes that our operating costs capital requirements and funding for our share repurchase

program for 2011 will be funded through our current cash balances our existing credit facilities which place

certain limitations on additional debt stock repurchases acquisitions and on the amount of dividends we may

pay and also contain certain other financial and operating covenants and cash from operations without the

need for additional financing We are undertaking multi-year business system transformation initiative

pursuant to which we will develop and implement an ERP system to better support our business model and

further streamline our operations It is the Companys intent to finance these costs with cash from operations

without the need for additional financing However as discussed in the section entitled Special Note

regarding Forward-Looking Statements in Part Item 1A Risk Factors of this Annual Report on Form 10-K

several risks and uncertainties could require that the Company raise additional capital through equity and/or

debt financing From time to time the Company considers acquisition opportunities which if pursued could

also result in the need for additional financing However if the need arises our ability to obtain any additional

credit facilities will depend upon prevailing market conditions our financial condition and the terms and

conditions of such additional facilities The continued volatility in the credit markets could result in significant

increases in borrowing costs for any new debt we may require

Aggregate Contractual Obligations

At December 31 2010 we have the following contractual obligations due by period

Less Than More Than

Total Year 1-3 Years 3-5 Years Years

Dollars in millions

Operating leasesl $210.2 50.9 $71.9 $43.3 $44.1

Production purchase obligations2 219.4 219.4

Non-production purchase obligations3 32.2 18.1 14.1

Deferred compensation plan4 7.1 0.6 0.7 0.6 5.2

Total5 $468.9 $289.0 $86.7 $43.9 $49.3

See Note 16 to our consolidated financial statements in Part II Item of this Annual Report on

Form 10-K

Production purchase obligations consist of open production purchase orders for sourced footwear apparel

and accessories and materials used to manufacture footwear

Non-production purchase obligations consist of open purchase orders for operating expense purchases

relating to goods or services ordered in the normal course of business

Our deferred compensation plan liability was $7.1 million at December 31 2010 See Note to our cOn

solidated financial statements in Part II Item of this Annual Report on Form 10-K

We had $22.7 million of gross liability for uncertain tax positions recorded in other long-term liabilities on

our consolidated balance sheet at December 31 2010 We are not able to reasonably estimate in which

future periods these amounts will ultimately be settled See Note 11 to our consolidated financial state

ments in Part II Item of this Annual Report on Form 10-K

Off Balance Sheet Arrangements

Letters of Credit

As of December 31 2010 2009 and 2008 we had letters of credit outstanding of $16.5 million

$16.6 million and $16.1 million respectively These letters of credit were issued principally in support of retail

commitments

We use funds from operations and unsecured committed and uncommitted lines of credit as the primary

sources of financing for our seasonal and other working capital requirements Our principal risks to these

sources of financing are the impact on our financial condition from economic downturns decrease in the

demand for our products increases in the prices of materials and variety of other factors

34

New Accounting Pronouncements

discussion of new accounting pronouncements none of which had material impact on our operations financial condition or liquidity is included in Note Sunmiary of Significant Accounting Policies to our

consolidated financial statements in Part II Item of this Annual Report on Form 10-K

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business our financial position and results of operations are routinely subject to

variety of risks including market risk associated with interest rate movements on borrowings and investments

and currency rate movements on non-U.S dollar denominated assets liabilities and cash flows We regularly assess these risks and have established policies and business practices that should mitigate portion of the

adverse effect of these and other potential exposures

We utilize cash from operations and U.S dollar denominated borrowings to fund our working capital and

investment needs Short-term debt if required is used to meet working capital requirements and long-term

debt if required is generally used to finance long-term investments In addition we use derivative instruments

to mitigate the impact of foreign currency fluctuations on portion of our foreign currency transactions These

derivative instruments are viewed as risk management tools and are not used for trading or speculative

purposes Cash balances are invested in high-grade securities with terms less than three months

We have available unsecured committed and uncommitted lines of credit as sources of financing for our

working capital requirements Borrowings under these credit agreements bear interest at variable rates based

on either lenders cost of funds plus an applicable spread or prevailing money market rates As of

December 31 2010 2009 and 2008 we had no short-term or long-term debt outstanding

Our fOreign currency exposure is generated primarily from our European operating subsidiaries and to

lesser degree our Asian and Canadian operating subsidiaries We seek to mitigate the impact of these foreign

currency fluctuations through risk management program that includes the use of derivative financial

instruments primarily foreign currency forward contracts These derivative instruments are carried at fair value

on our balance sheet The Company has implemented program that qualifies for hedge accounting treatment

to aid in mitigating our foreign currency exposures and decrease the volatility of our earnings The foreign

currency forward contracts under this program will expire in 13 months or less Based upon sensitivity analysis

as of December 31 2010 10% change in foreign exchange rates would cause the fair value of our financial

instruments to increase/decrease by approximately $19.4 million compared with an increase/decrease of

$12.2 million as of December 31 2009 The increase as of December 31 2010 compared to December 31

2009 is primarily related to an increase in our foreign currency denominated exposures as well as the

percentage of those exposures we have hedged as of December 31 2010 compared with December 31 2009

35

ITEM FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of The Timberland Company

Stratham New Hampshire

We have audited the accompanying consolidated balance sheets of The Timberland Company and

subsidiaries the Company as of December 31 2010 and 2009 and the related consolidated statements of

income changes in stockholders equity and cash flows for each of the three years in the period ended

December 31 2010 Our audits also included the financial statement schedule listed in the Index at Item 15

These consolidated financial statements and financial statement schedule are the responsibility of the

Companys management Our responsibility is to express an opinion on the financial statements and financial

statement schedule based on our audits

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board United States Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material misstatement An audit includes

examining on test basis evidence supporting the amounts and disclosures in the financial statements An

audit also includes assessing the accounting principles used and significant estimates made by management as

well as evaluating the overall financial statement presentation We believe that our audits provide reasonable

basis for our opinion

In our opinion such consolidated financial statements present fairly in all material respects the financial

position of The Timberland Company and subsidiaries at December 31 2010 and 2009 and the results of their

operations and their cash flows for each of the three years in the period ended December 31 2010 in

conformity with accounting principles generally accepted in the United States of America Also in our

opinion such financial statement schedule when considered in relation to the basic consolidated financial

statements taken as whole presents fairly in all material respects the information set forth therein

We have also audited in accordance with the standards of the Public Company Accounting Oversight

Board United States the Companys internal control over financial reporting as of December 31 2010 based

on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission and our report dated February 22 2011 expressed an unqualified

opinion on the Companys internal control over financial reporting

Is DELOITTE TOUCHE LLP

Boston Massachusetts

February 22 2011

36

THE TIMBERLAND COMPANY

CONSOLIDATED BALANCE SHEETS As of December 31 2010 and 2009

2010 2009

Dollars in thousands

except per share data

ASSETS Current assets

Cash and equivalents 272221 289839 Accounts receivable net of allowance for doubtful accounts

of $10859 in 2010 and $12175 in 2009 188336 149178

Inventory 180068 158541

Prepaid expenses 32729 32863

Prepaid income taxes 25083 11793 Deferred income taxes 22562 26769 Derivative assets 29 1354

Total current assets 721028 670337

Property plant and equipment net 68043 69820

Deferred income taxes 15594 14903

Goodwill 38958 44353

Intangible assets net 34839 45532 Other assets net 13897 14962

Total assets 892359 859907

LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities

Accounts payable 91025 79911

Accrued expense

Payroll and related 47376 43512

Other 80675 81988 Income taxes payable 25760 21959 Deferred income taxes 48

Derivative liabilities 1690 389

Total current liabilities 246526 227807

Other long-term liabilities 34322 36483 Commitments and contingencies See Note 16 Stockholders equity

Preferred Stock $.01 par value 2000000 shares authorized none issued

Class Common Stock $.01 par value vote per share 120000000 shares

authorized 75543672 shares issued at December 31 2010 and

74570388 shares issued at December 31 2009 756 746

Class Common Stock $.01 par value 10 votes per share convertible into Class shares on one-for-one basis 20000000 shares authorized

10568389 shares issued and outstanding at December 31 2010 and

11089160 shares issued and outstanding at December 31 2009 106 111

Additional paid-in capital 280154 266457

Retained earnings 1071305 974683 Accumulated other comprehensive income 6671 15048

Treasury Stock at cost 35610050 Class shares at December 31 2010 and

31131253 Class shares at December 31 2009 747481 661428

Total stockholders equity 611511 595617

Total liabilities and stockholders equity 892359 859907

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

37

THE TIMBERLAND COMPANY

CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31 2010 2009 and 2008

2010 2009 2008

Amounts in thousands except per share data

Revenue $1429484 $1285876 $1364550

Cost of goods sold 732970 682954 743817

Gross profit 696514 602922 620733

Operating expense

Selling 427367 407987 437730

General and administrative 123912 116772 113011

Litigation settlement 2630

Impairment of goodwill 5395

Impairment of intangible assets 8556 925 2061

Gain on termination of licensing agreements 3000

Restructuring _________ 236 925

Total operating expense 562230 525448 551097

Operating income 134284 77474 69636

Other income/expense

Interest income 434 903 2371

Interest expense 538 498 652

Other net 7080 3506 5455

Total other income/expense net 6976 3911 7174

Income before provision for income taxes 141260 81385 76810

Provision for income taxes 44638 24741 33904

Net income 96622 56644 42906

Earnings per share

Basic 1.84 1.01 0.73

Diluted 1.82 1.01 0.73

Weighted-average shares outstanding

Basic 52498 56034 58442

Diluted 52990 56352 58786

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

38

THE TIMBERLAND COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY For the Years Ended December 31 2010 2009 and 2008

Balance January 2008 $734

Issuance/conversion of shares of common

stock

Surrender of shares of common stock

Repurchase of common stock

Share-based compensation expense

Tax deficiency from share-based

compensation

Comprehensive income

Net income

Translation adjustment

Change in fair value of cash flow hedges

net of taxes

Other adjustment net of taxes

Comprehensive income

Balance December 31 2008 738

Issuance/conversion of shares of common

stock

Surrender of shares of common stock

Repurchase of common stock

Share-based compensation expense

Tax deficiency from share-based

compensation

Comprehensive income

Net income

Translation adjustment

Change in fair value of cash flow hedges

net of taxes

Other adjustment net of taxes

Comprehensive income

Balance December 31 2009

Issuance/conversion of shares of common

stock

Surrender of shares of common stock

Repurchase of common stock

Share-based compensation expense

Tax benefit from share-based

compensation

Comprehensive income

Net income

Translation adjustment

Change in fair value of cash flow hedges

net of taxes

Other adjustment net of taxes

Comprehensive income

Balance December 31 2010 $756

Accumulated

Class Class Additional Other Total

Common Common Paid-in Retained Comprehensive Treasury Comprehensive Stockholders Stock Stock Capital Earnings Income/Loss Stock Income Equity

Dollars in thousands

$117 $251063 875133 20106 $569993 $577160

2121 2123

410 410

44761 8166

1083 1083

1284

44980

2063 2063

56644 56644

5877 5877 5877

3725 353

59149

96622 96622 96622

5630 5630 5630

2495 2495 2495

252 252 252

88245

$611511

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

44761

8166

42906

15955

8254

138

42906

15955

8254

138

35343

12543 615164 ________

115 260267 918039

1958

6295

42906

15955

8254

138

576538

1962

1284 44980

6295

56644

3725 .- 353

746 111 266457 974683 15048 661428

10

3725 353

5956 17

4407

981

85072 8997

4402

981 85072

8997

298298

$106 $280154 $1071305 6671 $747481

39

THE TIMBERLAND COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31 2010 2009 and 2008

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

2010 2009 2008

Dollars in thousands

Cash flows from operating activities

Net income 96622 56644 42906

Adjustments to reconcile net income to net cash provided by operating

activities

Deferred income taxes 3407 450 2784 Share-based compensation 9287 5942 8518

Depreciation and amortization 25500 28783 32345 Provision for losses on accounts receivable 1242 3224 7575

Impairment of goodwill 5395

Impairment of intangible assets 8556 925 2061

Impairment of other long-lived assets 989 3023 1154

Litigation settlement 2630 Tax expense from share-based compensation net of excess benefit 463 2214 1254 Unrealized gain/loss on derivatives 422 333 131 Other non-cash charges/credits net 1567 1381 2274 Increase/decrease in cash from changes in operating assets and

liabilities net of the effect of business combinations

Accounts receivable 43559 18206 3847

Inventory 20285 24178 20789 Prepaid expenses and other assets 1539 1479 4963 Accounts payable 9013 17762 11533 Accrued expense 2590 11846 3809

Prepaid income taxes 13290 4894 674 Income taxes payable 2120 2093 7270 Other liabilities 332 626 767

Net cash provided by operating activities 87850 135851 147720

Cash flows from investing activities

Acquisition of business and purchase price adjustments net of cash

acquired 1554 970 Additions to property plant and equipment 19917 17677 22316 Other 707 849 141

Net cash used by investing activities 20624 20080 21205

Cash flows from financing activities

Common stock repurchases 85233 43905 46261 Issuance of common stock 4406 1962 1875 Excess tax benefit from share-based compensation 761 151 183

Other 971 1284 Net cash used by financing activities 81037 43076 44203

Effect of exchange rate changes on cash and equivalents 3807 45 8397 Net increase/decrease in cash and equivalents 17618 72650 73915 Cash and equivalents at beginning of year 289839 217189 143274

Cash and equivalents at end of year $272221 $289839 $217189

Supplemental disclosures of cash flow information

Interest paid 376 331 486

Income taxes paid 52134 23513 24863 Non-cash investing activity purchase of hardware and software on

account 2305

40

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts in Thousands Except Share and Per Share Data

Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of The Timberland Company and its

subsidiaries we our us its Timberland or the Company All intercompany transactions have been eliminated in consolidation

Fiscal Calendar

The Companys fiscal quarters end on the Friday closest to the calendar quarter end except that the

fourth quarter and fiscal year always end on December 31

Nature of Operations

We design develop and market premium quality footwear apparel and accessories products for men

women and children under the Timberland Timberland PRO Timberland Boot Company SmartWool and howies brands We sell our products through independent retailers better department stores athletic

stores and other national retailers through Timberland-owned retail including stores and Internet sales and

through mix of independent distributors franchisees and licensees worldwide

We manage our business in three major segments each sharing similar product distribution and

marketing North America Europe and Asia See Note 14 for additional information regarding our revenues

by product and geography

We sourced approximately 88% 90% and 89% of our footwear products from unrelated manufacturing

vendors in 2010 2009 and 2008 respectively The remainder was produced in our manufacturing facilities in

the Dominican Republic All of our apparel and accessories products are sourced from Unrelated manufactur

ing vendors

Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally

accepted in the United States of America requires us to make estimates and assumptions that affect the

amounts reported in the consolidated financial statements and accompanying notes Actual results may differ

from these estimates The significant estimates in the consolidated financial statements include sales returns

and allowances allowance for doubtful accounts receivable derivatives incentive compensation accruals

share-based compensation contingent liabilities impairment of long-lived assets and goodwill and income

taxes

Revenue Recognition

Our revenue consists of sales to wholesale customers including distributors and franchisees retail store

and e-commerce revenues license fees and royalties We record wholesale and e-commerce revenues when

title passes and the risks and rewards of ownership have passed to our customer based on the terms of sale

Title passes generally upon shipment to or upon receipt by our customer depending on the country of sale and

the agreement with our customer Retail store revenues are recorded at the time of the sale License fees and

royalties are recognized as earned per the terms of our licensing agreements We also sell gift cards Revenue

from gift cards which is not material to total revenue is recognized at the time of redemption

Taxes collected from customers and remitted to governmental authorities such as sales use and value

added taxes are recorded on net basis

In 2010 2009 and 2008 we recorded $3091 $2320 and $2848 of reimbursed shipping expenses within

revenues and the related shipping costs within selling expense respectively Shipping costs are included in

selling expense and were $21331 $16012 and $18658 for 2010 2009 and 2008 respectively Our cost of

41

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

sales may not be comparable with the cost of sales of other companies as our shipping costs are not included

in costs of sales

We record reductions to revenue for estimated wholesale and retail customer returns and allowances in the same period the related sales are recorded We base our estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns and allowances which are known

to us but which have not yet been received or paid Our total reserves for sales returns and allowances were

$29307 and $27139 at December 31 2010 and 2009 respectively

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments We estimate potential losses primarily based on our historical rate of credit losses and our knowledge of the financial condition of our customers Our allowance for doubtful

accoUnts totaled $10859 and $12175 at December 31 2010 and 2009 respectively

During 2008 the Company was assigned the lease on two retail locations from franchisee As part of

this transaction the Company recorded non-cash exchange of key money asset totaling $2700 in partial settlement of certain overdue accounts receivable balances from this franchisee

Advertising

Advertising costs are expensed at the time the advertising is used predominantly in the season that the

advertising costs are incurred As of December 31 2010 and 2009 we had $1563 and $958 respectively of

prepaid advertising costs recorded on our consolidated balance sheets Advertising expense which is included

in selling expense in our consolidated statements of income was $47146 $40680 and $43123 in 2010 2009

and 2008 respectively Advertising expense includes co-op advertising costs consumer-facing advertising

costs such as print television and Internet and digital campaigns production costs including agency fees and

catalog costs In 2010 increased investment in consumer-facing marketing and branding programs including Internet and other digital and social media initiatives as well as magazine campaigns was partially offset by

lower levels of television advertising and related media production costs The decrease in advertising expense from 2008 to 2009 is primarily due to lower co-op advertising spending as well as television and magazine

advertising Television advertising in 2008 included global campaign which coincided with the summer

Olympics

Translation of Foreign Currencies

The majority of our subsidiaries have adopted their local currencies as their functional currencies We

translate financial statements denominated in foreign currencies by translating balance sheet accounts at the

end of period exchange rates and statement of income accounts at the average exchange rates for the period

Cumulative translation gains and losses are recorded in accumulated other comprehensive income in

stockholders equity and changes in cumulative translation gains and losses are reflected in comprehensive

income Realized gains and losses on transactions are reflected in earnings Other net included $7135 $100

and $6574 of foreign exchange gains for 2010 2009 and 2008 respectively reflecting net currency gains and

losses associated with foreign currency denominated receivables and payables

Cash and Equivalents

Cash and equivalents consist of short-term highly liquid investments that have original maturities to the

Company of three months or less

Inventory

Inventory is stated at the lower of cost first-in first-out or market Cost includes materials labor and

manufacturing overhead related to the purchase and production of inventories Market value is estimated based

upon assumptions made about future demand and retail market conditions If we determine that the actual

42

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

market value differs from the carrying value of our inventory we make an adjustment to reduce the value of

our inventory to its net realizable value

Derivatives

We are exposed to foreign currency exchange risk when we purchase and sell goods in foreign currencies

It is our policy and business practice to manage portion of this risk through forward purchases and sales of

foreign currencies thereby locking in the future exchange rates These derivative instruments are viewed as

risk management tools and are not used for trading or speculative purposes We use our operating budget and

forecasts to estimate our economic exposure and to determine our hedging strategy

Derivatives settling within the next twelve months are recognized at fair value and included in either

current derivative assets or current derivative liabilities on our consolidated balance sheets Changes in fair

value of derivatives not designated or effective as hedges are recorded in other net

The Company has program that qualifies for hedge accounting treatment to aid in mitigating the

Companys foreign currency exposures and to decrease the volatility in earnings Under this hedging program

the Company performs quarterly assessment of the effectiveness of the hedge relationship and measures and

recognizes any hedge ineffectiveness in earnings 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 fair value or

cash flows of the hedged item attributable to the risk being hedged The Companys hedging strategy uses

forward contracts as cash flow hedging instruments which are recorded in the 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 and reclassified to earnings in cost of

goods sold in the period that the transaction that is subject to the related hedge contract is recognized in

earnings Cash flows associated with these contracts are classified as operating cash flows in the consolidated

statements of cash flows Hedge ineffectiveness is evaluated using the hypothetical derivative method and the

ineffective portion of the hedge is reported in other net in our consolidated statements of income

Property Plant and Equipment

We record property plant and equipment at cost We provide for depreciation using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases if such periods are

shorter The principal estimated useful lives are to 20 years for building and improvements to 12 years for

machinery and equipment and years for lasts patterns and dies

Goodwill and Indefinite-lived Intangible Assets

Goodwill and indefinite-lived intangible assets are evaluated for impairment at least annually at the end

of our second fiscal quarter or when events occur or circumstances change that would more likely than not

reduce the fair value of the reporting unit or asset below its carrying amount using forecasts of discounted

future cash flows Events or circumstances that might require an interim evaluation include unexpected adverse

business conditions material changes in market capitalization economic factors technological changes and

loss of key personnel Should the fair value of the Companys goodwill or indefinite-lived intangible assets

decline because of decline in operating performance market declines or other indicators of impairment or

as result of changes in the discount rate charges for impairment may be necessary

Long-lived Assets

We periodically evaluate the carrying values and estimated useful lives of our long-lived assets primarily

property plant and equipment and finite-lived intangible assets When factors indicate that such assets should

be evaluated for possible impairment we use estimates of undiscounted future cash flows to determine whether

the assets are recoverable If the undiscounted cash flows are insufficient to recover the carrying value an

impairment loss is recognized

43

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

Contingencies

In the ordinary course of business we are involved in legal matters involving contractual and employment

relationships product liability claims trademark rights and variety of other matters We record contingent liabilities resulting from such matters when it is probable that liability has been incurred and the amount of

the loss is reasonably estimable see Note 16

Income Taxes

Deferred income taxes are recognized based on temporary differences between the financial statement and

tax bases of assets and liabilities Deferred tax assets and liabilities are measured using the statutory tax rates

and laws expected to apply to taxable income in the years in which the temporary differences are expected to

reverse Valuation allowances are provided against net deferred tax assets if based upon the available

evidence it is more likely than not that some or all of the deferred tax assets will not be realized The ultimate

realization of deferred tax assets is dependent upon the generation of future taxable income and the timing of

the temporary differences becoming deductible Management considers among other available information scheduled reversals of deferred tax liabilities projected future taxable income limitations of availability of net

operating loss carry-forwards and other matters in making this assessment

The Company recognizes the impact of tax position in its financial statements if that position is more

likely than not to be sustained upon examination by the appropriate taxing authority based on its technical

merits

We recognize interest expense on the amount of underpaid taxes associated with our tax positions

beginning in the first period in which interest starts accruing under the tax law and continuing until the tax

positions are settled We classify interest associated with underpayments of taxes within the income tax

provision in our statement of income and in income taxes payable and other long-term liabilities on our

consolidated balance sheet

If tax position taken does not meet the minimum statutory threshold to avoid the payment of penalty an accrual for the amount of the penalty that may be imposed under the tax law is recorded Penalties are

classified within the income tax provision in our statement of income and in other long-term liabilities on our

consolidated balance sheet

Earnings Per Share EPS Basic earnings per share 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 earnings per share 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

44

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

The following is reconciliation of the number of shares in thousands included in the basic and diluted

EPS computations for the years ended December 31 2010 2009 and 2008

December 31 2010 2009 2008

Weighted- Per- Weighted- Per- Weighted- Per-

Net Average Share Net Average Share Net Average Share

Income Shares Amount Income Shares Amount Income Shares Amount

Basic EPS $96622 52498 $1.84 $56644 56034 $1.01 $42906 58442 $0.73

Dilutive securities

Stock options and employee

stock purchase plan

shares 358 .02 58 51

Nonvested shares 134 260 293

Effect of dilutive securities ______

492 .02 318 344

Diluted EPS $96622 52990 $1.82 $56644 56352 $1.01 $42906 58786 $0.73

The following stock options and nonvested shares in thousands were outstanding as of December 31

2010 2009 and 2008 but were not included in the computation of diluted EPS as their inclusion would be

anti-dilutive

December 31 2010 2009 2008

Anti-dilutive securities 2514 3967 4405

Share-based Compensation

The Company measures the grant date fair value of equity awards given to employees in exchange for

services and recognizes that cost over the period that such services are performed The Company recognizes

the cost of share-based awards on straight-line basis over the awards requisite service period with the

exception of certain stock options for officers directors and key employees granted prior to but not yet vested

as of January 2006 and awards granted under certain long-term incentive plans for which expense

continues to be recognized on graded schedule over the vesting period of the award The Company estimates

the fair value of its stock option awards and employee stock purchase plan rights on the date of grant using

the Black-Scholes option valuation model See Note 13 for additional information

Comprehensive Income

Comprehensive income is the combination of reported net income and other comprehensive income/loss

which is comprised primarily of foreign currency translation adjustments and changes in the fair value of cash

flow hedges

The components of accumulated other comprehensive income/loss as of December 31 2010 and 2009

were

2010 2009

Cumulative translation adjustment 8023 $13653

Fair value of cash flow hedges net of taxes of $84 at December 31 2010 and $47 at December 31 2009 1591 904

Other adjustment net of taxes of $96 at December 31 2010 and $147 at

December 31 2009 239 491

Total 6671 $15048

45

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

New Accounting Pronouncements

In December 2010 the Financial Accounting Standards Board FASB issued Accounting Standards Update ASU No 2010-28 When to Perform Step of the Goodwill Impairment Test for Reporting Units With Zero or Negative Carrying Amounts This accounting standard update requires entities with zero or

negative carrying value to assess considering adverse qualitative factors whether it is more likely than not

that goodwill impairment exists If an entity concludes that it is more likely than not that goodwill

impairment exists the entity must perform step of the goodwill impairment test ASU No 20 10-28 is effective for impairment tests performed by the Company during 2011 and its adoption is not expected to

have material impact on the Companys results of operations or financial position

In January 2010 the FASB issued ASU No 2010-06 Improving Disclosures About Fair Value Measure ments This accounting standard update requires additional fair value measurement disclosures for transfers

into and out of Levels and and separate disclosures for purchases sales issuances and settlements relating

to Level measurements It also clarifies existing fair value disclosure requirements regarding 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 2010 and its adoption did not have material impact on the Companys

existing disclosures

Inventory

Inventory consists of the following

December 31 2010 2009

Materials 11299 7944

Work-in-process 841 740

Finished goods 167928 149857

Total $180068 $158541

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 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-U.S 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 As matter of policy we enter into these derivative contracts only with

counterparties having minimum investment-grade or better credit rating Credit risk is managed through the

continuous monitoring of exposures to such counterparties We do not believe there is significant risk of ioss in the event of non-performance by the counterparties associated with these instruments because these

transactions are executed with group of major financial institutions and have varying maturities through

January 2012

Cash Flow Hedges

The Company principally uses foreign currency forward contracts as cash flow hedges to offset the effects

of exchange rate fluctuations on certain of its forecasted foreign currency denominated sales transactions The

46

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

Companys cash flow exposures include anticipated foreign currency transactions such as foreign currency

denominated sales costs expenses intercompany 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 program that qualifies for hedge accounting treatment

to aid in mitigating its foreign currency exposures and to decrease earnings volatility Under this hedging

program the Company performs quarterly assessment of the effectiveness of the hedge relationship and

measures and recognizes any hedge ineffectiveness in earnings hedge is considered 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 hedge relationship

The Companys hedging strategy uses forward contracts as cash flow hedging instruments which are

recorded in our consolidated balance sheet 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 transaction that is subject to the related hedge contract is recognized in earnings Cash flows associated with these contracts are

classified as operating cash flows in the 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

consolidated statement of income in other net The amount of hedge ineffectiveness for the years ended

December 31 2010 2009 and 2008 was not material

The notional value latest maturity date and fair value of foreign currency forward sell contracts entered

into as cash flow hedges as of December 31 2010 and December 31 2009 are as follows

Contract Contract

Amount Amount

U.S.$ Maturity Fair U.S.$ Maturity Fair

Currency Equivalent Date Value Currency Equivalent Date Value

Pounds Sterling 20410 2011 59 Pounds Sterling 18216 2010 55

Pounds Sterling 3126 2012 19 Pounds Sterling 2441 2011 22

Euro 85122 2011 646 Euro 62168 2010 648

Euro 3292 2012 45 Euro 2230 2011 86

Japanese Yen 19185 2011 886 Japanese Yen 12766 2010 58

Japanese Yen 3632 2012 84 Japanese Yen 3317 2011 73

December 31 2010 $134767 $170l December 31 2009 $101138 $942

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 dollar-denominated

cash balances using forward contracts These forward contracts which are undesignated hedges of economic

risk are recorded at fair value in the balance sheet with changes in the fair value of these instruments

recognized in earnings immediately The gains or losses related to the contracts largely offset the remeasure

ment of those assets and liabilities Cash flows associated with these contracts are classified as operating cash

flows in the consolidated statements of cash flows

The notional value latest maturity date and fair 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

47

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

follows the contract amount represents the net amount of all purchase and sale contracts of foreign

currency

Contract Contract

Amount Amount

U.S.$ Maturity U.S.$ Maturity

Currency Equivalent Date Fair Value Currency Equivalent Date Fair Value

Pounds Sterling 9312 2011 $41 Pounds Sterling $12922 2010 Euro 8913 2011 Euro 14122 2010 94

Japanese Yen 28680 2011 35 Japanese Yen 8013 2010 59 Canadian Dollar 6013 2011 11 Canadian Dollar 8204 2010 23

Norwegian Kroner 2219 2011 Norwegian Kroner 2335 2010 16

Swedish Krona 2601 2011 Swedish Krona 1969 2010 12

December 31 2010 57738 $70 December 31 2009 21721 $205

Buy Contracts $14061 $27 Buy Contracts $22572 60 Sell Contracts 71799 43 Sell Contracts 44293 265

Total Contracts 57738 $70 Total Contracts 21721 $205

Fair Value of Derivative Instruments

The following table summarizes the fair values and presentation in the consolidated balance sheets for

derivatives which consist of foreign exchange forward contracts as of December 31 2010 and 2009

Asset Derivatives Liability Derivatives

Balance Sheet Location December 31 2010 December 31 2009 December 31 2010 December 31 2009

Derivatives designated as

hedging instruments

Derivative assets $1313 $224

Derivative liabilities 1693 3284 335

Other assets net 184

Other long-term liabilities 67 178

$1766 $1503 $3467 $561

Derivatives not designated as

hedging instruments

Derivative assets 29 265

Derivative liabilities 105 60

35 $265 $105 $60

Total derivatives $1801 $1768 $3572 $621

Certain of our derivative contracts are covered under master netting arrangement see Note

48

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

The Effect of Derivative Instruments on the Statements of Income for the Years Ended December 31

2010 2009 and 2008

The following table summarizes the impact on OCT as of December 31 2010 and 2009 and the statement

of income for the years ended December 31 2010 2009 and 2008 for derivatives which consist of foreign

exchange forward contracts

Derivatives in Cash Flow

Hedging Relationships 2010 2009 2008

Gain/loss recognized in OCI net of taxes effective portion 1591 904 4629

Gainlloss reclassified from OCT into cost of goods sold effective portion 4609 $1398 $3390

The Company expects to reclassify pre-tax losses of $1701 to the statement of income in cost of goods

sold within the next twelve months

Derivatives not Designated

as Hedging Instruments 2010 2009 2008

Gainlloss reÆognized in other net $1669 $1371 $727

During the year ended December 31 2009 the Company de-designated certain cash flow hedges that

related to its Japanese Yen exposure Included in other net above is net loss of approximately $14 related to

these contracts

Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of

temporary cash investments trade receivables and derivative instruments We place our temporary cash

investments and derivative instruments with variety of high credit quality financial institutions thereby

minimizing exposure to concentration of credit risk As matter of policy we enter into derivative contracts

only with counterparties having minimum investment-grade or better credit rating Credit risk is managed

through the continuous monitoring of exposures to such counterparties Credit risk with respect to trade

receivables is limited due to the large number of customers included in our customer base

Fair Value of Financial Instruments

Accounting Standards Codification Topic 820 Fair Value Measurements and Disclosures establishes

fair value hierarchy that ranks the quality and reliability of the information used to determine fair value Tn

general fair values determined by Level 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

inputs utilize data points that are observable such as quoted prices interest rates and yield curves Level

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 and Level and into and out of Level as of the actual date of the event or change in circumstances

that caused the transfer For the years ended December 31 2010 and 2009 the Company did not have any

financial assets or liabilities or nonfinancial assets or liabilities recognized or disclosed at fair value on

recurring basis for which significant unobservable inputs Level were used to measure fair value

49

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

Financial Assets and Liabilities

The following tables present information about our assets and liabilities measured at fair value on

recurring basis as of December 31 2010 and 2009

Impact of 2010

Description Level Level Level Netting Total

Assets

Cash equivalents

Time deposits $95000 $95000

Mutual funds $13202 $13202

Foreign exchange forward contracts

Derivative assets 1801 $1771 30

Cash surrender value of life insurance 7564 7564

Liabilities

Foreign exchange forward contracts

Derivative liabilities 3572 $1771 1801

Impact of 2009

Description Level Level Level Netting Total

Assets

Cash equivalents

Time deposits $70041 $70041

Mutual funds $95871 $95871

Foreign exchange forward contracts

Derivative assets 1768 $230 1538

Cash surrender value of life insurance 8036 8036

Liabilities

Foreign exchange forward contracts

Derivative liabilities 621 $230 391

Cash equivalents included in cash and equivalents on our consolidated balance sheet include money market mutual funds and time deposits placed with 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 tables above is reported on gross basis by level based

on the fair value hierarchy with corresponding adjustment for netting for financial statement presentation

purposes where appropriate As of December 31 2010 and 2009 the derivative contracts above include $1

and $184 respectively of assets included in other assets net on our consolidated balance sheet and $111 and

$2 respectively of liabilities included in other long-term liabilities on our consolidated balance sheet The

Company often enters into derivative contracts with single counterparty and certain of these contracts are

covered under 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

The cash surrender value of life insurance represents insurance contracts held as assets in rabbi trust to

fund the Companys deferred compensation plan These assets are included in other assets net on our

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

50

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

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 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 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 $5395 Management also concluded that the carrying value of

the IPath and howies trademarks and other intangible assets exceeded the estimated fair value and accordingly

recorded an impairment charge of $7854 The Companys North America Wholesale and Europe Wholesale

business units have fair values substantially in excess of their carrying value see Note

Impairment charges included in the 2010 consolidated statement of income by segment are as follows

North America Sub- Europe Sub- Total

IPath Retail Total IPath Howies Retail Total Company

Goodwill $4118 $794 $4912 $483 483 5395

Trademarks 2407 2407 1426 3181 4607 7014

Other intangibles 1298 1298 244 244 1542

$7823 $794 $8617 $1426 $3425 $483 $5334 $13951

These non-recurring fair value measurements were developed using significant unobservable inputs

Level For goodwill the primary valuation technique used was the discounted cash flow analysis based on

managements 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

market-based valuation method involving analysis of market multiples of revenues and earnings before interest

taxes depreciation and amortization for 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 stand-alone basis and this combination is indicative

of the factors market participant would consider when performing 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 using 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

Managements business plans and projections were used to develop the expected cash flows for the next five

years and 4% residual revenue growth rate applied thereafter The analysis reflects market royalty rate of

1.5% and weighted average discount rate of 22% derived primarily from published sources and adjusted for

increased market risk We recorded charges of $8547 in the second quarter of 2010 which reduced the

carrying value of finite-lived trademark intangible assets to $720 and the carrying value of IPaths goodwill to

zero In the fourth quarter of 2010 the Company recorded an additional charge of $702 which reduced the

remaining carrying value of the IPath intangible assets to zero

51

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

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 Managements business

plans and projections were used to develop the expected cash flows for the next five years and 4% residual

revenue growth rate applied thereafter The analysis reflects market royalty rate of 2% and 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 $1200 of indefinite-lived trademark intangible assets remaining

North America and Europe Retail

The Companys retail businesses in North America and Europe have been negatively impacted by continued weakness in the macroeconomic environment low consumer spending and longer than expected

economic recovery The fair value of these businesses using the discounted cash flow analysis were based on

managements business plans and projections for the next five years and 4% residual growth thereafter The

analysis reflects 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

Other Long-lived Assets

During 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 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 pre-tax non-cash charge of

approximately $550 and $800 in the years ended December 31 2010 and 2009 respectively which reduced

the carrying value of the molds to zero The charge is reflected in cost of goods sold in our consolidated

statement of income and in Unallocated Corporate in our segment reporting

During 2010 and 2009 we also evaluated the carrying value of certain long-lived fixed assets primarily related to certain of our retail locations including leasehold improvements and in 2009 certain software

associated with our e-commerce platform With respect to store-level assets the Companys evaluation of

potential impairment includes Level input factors such as estimates of future cash flows based on past and

expected future performance intended future use of the assets and knowledge of the market in which the store

is located Based on this evaluation we determined that the carrying value of these assets was impaired and we

recorded pre-tax non-cash charge of approximately $500 in 2010 which is reflected in selling expense in

our consolidated statement of income Approximately $230 of the charge is in our North America segment

$265 is in our Europe segment and $5 is in our Asia segment In 2009 we recorded pre-tax non-cash charge of approximately $2125 of which $1800 is reflected in selling expense in our consolidated statement of

income and $325 is reflected in general and administrative expense Approximately $1800 of the charge is in

our North America segment $165 is in our Europe segment and $160 is in our Asia segment The charges

reduced the carrying value of these assets to zero

During 2009 the Company evaluated the carrying value of the GoLite trademark which is licensed to

third party for events or changes in circumstances indicating that the carrying value of the asset may not be

recoverable Considering such Level input factors as the ability of the licensee to obtain necessary financing

the impact of changes in economic conditions and an assessment of the Companys ability to recover all

contractual payments when due under the licensing arrangement the Company determined that the carrying value of the GoLite trademark was impaired and recorded pre-tax non-cash charge of approximately $925

which reduced the carrying value of the trademark to zero The charge is reflected in our Europe segment See

Note for additional information

52

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

Property Plant and Equipment

Property plant and equipment consist of the following

December 31 2010 2009

Land and improvements 501 501

Building and improvements 47171 47800

Machinery and equipment 165798 162515

Lasts patterns and dies 32935 30090

Total cost 246405 240906

Less accumulated depreciation 178362 171086

Net property plant and equipment 68043 69820

Depreciation expense was $22280 $24654 and $28005 for the years ended December 31 2010 2009

and 2008 respectively

Acquisitions

On March 16 2009 we acquired 100% of the stock of Glaudio Fashion B.V Glaudio for

approximately $1500 net of cash acquired Glaudio operates Timberland retail stores in the Netherlands

and Belgium which sell Timberland footwear apparel and accessories for men women and kids The

acquisition was effective March 2009 and the financial position and results of operations of Glaudio have

been included in our Europe segment from the effective date of the acquisition The acquisition of Glaudio

was not material to the results of operations finailcial position or cash flows of the Company

Goodwill and Other Intangible Assets

The Company tests goodwill for impairment annually at the end of its second quarter and when events

occur or circumstances change that would more likely than not reduce the fair value of business unit below

its carrying value During the quarter ended July 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 $5395 which reduced the carrying value of the

goodwill to zero See Note for additional information

summary of goodwill activity follows

December 31 2010 2009

Accumulated Accumulated

Gross Impairment Net Book Value Gross Impairment Net Book Value

Balance at beginning of

year $44353 $44353 $43870 $43870

Additions from

acquisitions Note 483 483

Impairment charges

Note 5395 5395 _______ Balance at end of year $44353 $5395 $38958 $44353 $44353

Indefinite-lived intangible assets are also 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 an

intangible asset with an indefinite-life below its carrying value The IPath business unit and howies have not

met the revenue and earnings growth forecasted at their acquisitions Accordingly during the second quarter of

2010 management reassessed the financial expectations of these businesses as part of its long range planning

process As result of this assessment and testing process management concluded that the carrying value of

53

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

the IPath and howies trademarks and other intangible assets exceeded the estimated fair value and accordingly recorded an impairment charge of $7854 In the fourth quarter of 2010 the Company recorded an additional

charge of $702 which reduced the remaining carrying value of IPath intangible assets to zero See Note for

additional information

On an on-going basis the Company evaluated the carrying value of the GoLite trademark which was

licensed to third party for events or changes in circumstances indicating that the carrying value of the asset

may not be recoverable Factors considered included the ability of the licensee to obtain necessary financing the impact of changes in economic conditions and an assessment of the Companys ability to recover all

contractual payments when due under the licensing arrangement During 2008 we evaluated the useful life

and carrying value of the GoLite indefinite-lived trademark in response to our decision to license the

trademark to third party We concluded that the trademark no longer met the definition of an indefinite-lived

intangible asset and began amortizing the trademark over 10-year period or the initial license term We

evaluated its carrying value using forecasts of undiscounted future cash flows and during 2008 recorded

$2061 of impairment charges related to this intangible asset which reduced its carrying value to approxi

mately $1000 at December 31 2008 During 2009 using the factors noted above the Company determined

that the carrying value of the GoLite trademark was further impaired and recorded charge of approximately

$925 which reduced the carrying value of the trademark to zero The charges are reflected in our Europe

segment

Intangible assets consist of trademarks and other intangible assets Other intangible assets consist of

customer patent and non-competition related intangible assets

Intangible assets consist of the following

December 31 2010 2009

Accumulated Net Book Accumulated Net Book

Gross Amortization Value Gross Amortization Value

Trademarks indefinite-lived $32402 $32402 $35841 $35841

Trademarks finite-lived 4064 2462 1602 10239 4149 6090 Other intangible assets finite-

lived 5995 5160 835 10723 7122 3601

Total $42461 $7622 $34839 $56803 $11271 $45532

We amortize intangible assets with finite useful lives assuming no expected residual value

December 31 2010 2009

Weighted average amortization period for trademarks subject to amortization years 5.0 11.7

Weighted average amortization period for other intangible assets years 5.7 5.7

Weighted average amortization period for all intangible assets subject to amortization

years 5.4 8.6

Amortization expense related to all intangible assets was $2223 $2883 and $3366 in 2010 2009 and

2008 respectively We estimate future amortization expense from intangible assets held as of December 31 2010 to be $1363 $538 $330 $162 and $44 in 2011 2012 2013 2014 and 2015 respectively

Deferred Compensation Plan

We have established an irrevocable grantors trust to hold assets to fund benefit obligations under the

Companys Deferred Compensation Plan the Plan Our obligations under the Plan consist of our unsecured contractual commitment to deliver at future date any of the following deferred compensation credited to

an account under the Plan ii additional amounts if any that we may from time to time credit to the Plan and iii notional earnings on the foregoing amounts based upon investment elections made by the participants The obligations are payable in cash upon retirement termination of employment and/or at certain other times

54

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

in lump-sum distribution or in installments as elected by the participant in accordance with the Plan The

Plan assets which reside in other assets net on our consolidated balance sheets were $7564 and $8036 as of

December 31 2010 and 2009 respectively The securities that comprise the Plan assets are Company-owned

life insurance policies These assets are subject to the claims of the general creditors of the Company in the

event of insolvency Our deferred compensation liability which is included in other long-term liabilities on our

consolidated balance sheet was $7140 and $6617 as of December 31 2010 and 2009 respectively

10 Credit Agreements

We have an unsecured committed revolving credit agreement with group of banks which matures on

June 2011 the Credit Agreement The Credit Agreement provides for $200000 of committed

borrowings of which up to $125000 may be used for letters of credit Any letters of credit outstanding under

the Credit Agreement $1595 at December 31 2010 reduce the amount available for borrowing under the

Credit Agreement Upon approval of the bank group we may increase the committed borrowing limit by

$100000 for total commitment of $300000 Under the terms of the Credit Agreement we may borrow at

interest rates based on Eurodollar rates approximately 0.3% as of December 31 2010 plus an applicable

margin of between 13.5 and 47.5 basis points based on fixed charge coverage grid that is adjusted quarterly

As of December 31 2010 the applicable margin under the facility was 47.5 basis points We will pay utilization fee of an additional basis points if our outstanding borrowings under the facility exceed $100000

We also pay commitment fee of 6.5 to 15 basis points per annum on the total commitment based on fixed

charge coverage grid that is adjusted quarterly As of December 31 2010 the commitment fee was 15 basis

points The Credit Agreement places certain limitations on additional debt stock repurchases acquisitions and

the amount of dividends we may pay and includes certain other financial and non-financial covenants The

primary financial covenants relate to maintaining minimum fixed charge coverage ratio of 2.251 and

maximum leverage ratio of 21 We measure compliance with the financial and non-financial covenants and ratios as required by the terms of the Credit Agreement on fiscal quarter basis

We had uncommitted lines of credit available from certain banks totaling $30000 as of December 31

2010 Any borrowings under these lines would be at prevailing money market rates Further we had an

uncommitted letter of credit facility of $80000 to support inventory purchases These arrangements may be

terminated at any time at the option of the banks or at our option

As of December 31 2010 and 2009 we had no borrowings outstanding under any of our credit facilities

We did not utilize our borrowing capability under the facilities at any point during 2010 and 2009

11 Income Taxes

The components of income before taxes are as follows

December 31 2010 2009 2008

Domestic 66271 $51432 $51779

Intemational 74989 29953 25031

Total $141260 $81385 $76810

The components of the provision for income taxes are as follows

2010 2009 2008

December 31 Current Deferred Current Deferred Current Deferred

Federal $28543 326 $13417 1834 $21434 3983 State 6244 165 3494 557 3648 774

Foreign 8077 2265 7252 1813 6115 2050

Total $42864 $1774 $24163 578 $31197 2707

55

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

The provision for income taxes differs from the amount computed using the statutory federal income tax

rate of 35.0% due to the following

December 31 2010 2009 2008

Federal income tax at statutory rate 49441 35.0% $28485 35.0% $26884 35.0%

State taxes net of applicable federal

benefit 3951 2.8 2633 3.2 2874 3.7

Foreign 11611 8.2 5556 6.8 3932 5.1 Tax examination settlements 6417 7.9 Uncertain tax positions 3960 2.8 4677 5.8 5974 7.8

Other net 1103 0.8 919 1.1 2104 2.7

Total 44638 31.6% $24741 30.4% $33904 44.1%

The tax effects of temporary differences and carry-forwards that give rise to deferred tax assets and

liabilities consist of the following

December 31 2010 2009

Deferred tax assets

Inventory 1257 2193

Receivable allowances 8834 8570

Employee benefit accruals 6252 4643

Interest 916 4783

Tax credits on undistributed foreign earnings 1261 2088

Deferredcompensation 3970 3075

Deferred unrecognized tax benefits 3952 5777

Share-based compensation 8280 7339

Net operating loss carry-forwards 5944 4990

Other 6563 7948

47229 51406

Deferred tax liabilities

Accelerated depreciation and amortization 3129 4744

Other 48

3129 4792

Net deferred tax asset before valuation allowance 44100 46614

Valuation allowance 5944 4990

Net deferred tax asset $38156 $41624

Deferred taxes are reported in the following balance sheet captions in the amounts shown

December 31 2010 2009

Deferred income taxes current assets $22562 $26769

Deferred income taxes non-current assets 15594 14903

Deferred income taxes current liabilities 48

Net deferred tax asset $38156 $41624

56

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

The valuation allowance relates to foreign net operating loss carry-forwards that may not be realized The

valuation allowance of $5944 at December 31 2010 includes $883 provided for during 2010 relating

primarily to net operating loss carry-forwards in Luxembourg The valuation allowance at December 31 2009

of $4990 includes $805 provided for during 2009 relating primarily to net operating loss carry-forwards in

Luxembourg

Losses before income taxes from foreign operations were $4026 $3659 and $4045 for the years ended December 31 2010 2009 and 2008 respectively At December 31 2010 the Company had $26654 of

foreign operating loss carry-forwards available to offset future foreign taxable income Of these operating loss

carry-forwards $356 will expire in various years from 2016 through 2019 and $26298 relates to operating loss carry-forwards that may be carried forward indefinitely

As of December 31 2010 the Company has indefinitely reinvested approximately $196864 of the

cumulative undistributed earnings of certain foreign subsidiaries Such earnings would be subject to U.S taxes

if repatriated to the U.S The amount of unrecognized deferred tax liability associated with the permanently reinvested cumulative undistributed earnings was approximately $43031

The following table reconciles the total amount recorded for unrecognized tax benefits for the years

ended December 31 2010 2009 and 2008

2010 2009 2008

Unrecognized tax benefits at January $19707 $23751 $19046

Gross increases tax positions in prior period 207 824

Gross decreases tax positions in prior period 1693 7062 Gross increases current-period tax positions 3685 3888 4317

Settlements 295

Lapse in statute of limitations 981 782 432

Unrecognized tax benefits at December 31 $20718 $19707 $23751

We had $22693 and $24748 gross liability for uncertain tax positions and accrued interest and

penalties included in other long-term liabilities on our balance sheet as of December 31 2010 and 2009

respectively We had $22 and $48 gross liability for uncertain tax positions and accrued interest and penalties included in accrued income taxes payable on our balance sheet as of December 31 2010 and 2009

respectively Of the total gross liability at the end of 2010 $18763 represents the amount of unrecognized tax

benefits that if recognized would affect the Companys effective tax rate

We recognize interest expense on the amount of taxes associated with our tax positions beginning in the first period in which interest starts accruing under the tax law and continuing until the tax positions are

settled We classify interest associated with underpayments of taxes as income tax expense in our consolidated statement of income and in other long-term liabilities and in accrued income taxes payable on the consolidated

balance sheet The gross amount of interest expense included in our income tax provision was $1046 $1276

and $1714 for the years ended December 31 2010 2009 and 2008 respectively The total amount of accrued

interest included in other long-term liabilities as of December 31 2010 and 2009 was $1802 and $4868

respectively The total amount of interest included in accrued income taxes payable as of December 31 2010

and 2009 was $22 and $48 respectively

If tax position taken does not meet the minimum statutory threshold to avoid the payment of penalty an accrual for the amount of the penalty that may be imposed under the tax law is recorded Penalties are classified as income tax expense in our consolidated statement of income and in other long-term liabilities on

our consolidated balance sheet There were no penalties included in our income tax provision for the year

ended December 31 2010 There were penalties of $53 and $120 included in our income tax provision for the

57

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

years ended December 31 2009 and 2008 respectively The total amount of penalties included in other long-

term liabilities at each of December 31 2010 and 2009 is $173

We conduct business globally and as result the Company or one or more of our subsidiaries files

income tax returns in the U.S federal jurisdiction and various state and foreign jurisdictions In the normal

course of business we are subject to examination by taxing authorities throughout the world including such

major jurisdictions as China France Germany Hong Kong Italy Japan Spain Switzerland the U.K and the

United States We are no longer subject to U.S federal state and local or non-U.S income tax examinations

for years before 2003

In 2010 we received final approval associated with tax clearance for certain foreign operations which

resulted in decrease in prior year tax positions of $1377 In 2009 we concluded audits internationally which

resulted in settlements of $295 and decreases in prior year tax positions of $7062 In 2008 we did not

conclude any audits It is reasonably possible that unrecognized tax benefits

related to federal state and

foreign tax positions may decrease by $8400 by December 31 2011 if audits are completed or tax years close

during 2011

In December of 2009 we received Notice of Assessment from the Internal Revenue Department of

Hong Kong for approximately $17600 with respect to the tax years 2004 through 2008 In connection with

the assessment the Company made required payments to the Internal Revenue Department of Hong Kong

totaling approximately $8400 in 2010 These payments are included in prepaid taxes on our consolidated

balance sheet We believe we have sound defense to the proposed adjustment and will continue to firmly

oppose the assessment We believe that the assessment does not impact the level of liabilities for our income

tax contingencies However actual resolution may differ from our current estimates and such differences

could have material impact on our future effective tax rate and our results of operations

12 Stockholders Equity

Our Class Common Stock and Class Common Stock are identical in virtually all respects except

that shares of Class Common Stock carry one vote per share while shares of Class Common Stock carry

ten votes per share In addition holders of Class Common Stock have the right voting separately as class

to elect 25% of the directors of the Company and vote together with the holders of Class Common Stock

for the remaining directors Class Common Stock may be converted to Class Common Stock on

one-for-one basis In 2010 2009 and 2008 respectively 520771 440000 and 214500 shares of Class

Common Stock were converted to Class Common Stock

On February 2006 our Board of Directors approved repurchase of 6000000 shares of our Class

Common Stock During 2008 we repurchased 1281602 shares under this authorization No shares remain

under this authorization

On March 10 2008 our Board of Directors approved the repurchase of up to an additional

6000000 shares of our Class Common Stock Shares repurchased under this authorization totaled

1324259 3244643 and 1431098 for the years ended December 31 2010 2009 and 2008 respectively No

shares remain under this authorization

On December 2009 our Board of Directors approved the repurchase of up to an additional

6000000 shares of our Class Common Stock Shares repurchased under this authorization totaled 3102563

for the year ended December 31 2010 As of December 31 2010 2897437 shares remained available for

purchase under this authorization

From time to time we use plans adopted under Rule lObs- promulgated by the Securities and Exchange

Commission under the Securities Exchange Act of 1934 as amended to facilitate share repurchases

During 2010 2009 and 2008 certain employees surrendered restricted shares valued at approximately

$981 $1284 and $410 respectively to the Company to satisfy tax withholding obligations

58

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

13 Share-based Compensation

The Company accounts for share-based compensation by measuring the grant date fair value of equity awards given to employees in exchange for services and recognizing that cost over the period that such

services are performed The Company recognizes the cost of share-based awards on straight-line basis oyer the awards requisite service period with the exception of certain stock options for officers directors and key

employees granted under certain long-term incentive plans for which expense continues to be recognized on

graded schedule over the vesting period of the award The Company is required to estimate the number of all

share-based awards that will be forfeited and uses historical data to estimate its forfeitures

Share-based compensation costs were recorded in cost of good sold selling expense and general and

administrative expense as follows for the years ended December 31 2010 2009 and 2008

December 31 2010 2009 2008

Cost of goods sold 351 700 $1385

Selling expense 2944 2837 4529

General and administrative expense 5992 2405 2604

Total $9287 $5942 $8518

Incentive Plans

In February 2007 our Board of Directors adopted The Timberland Company 2007 Incentive Plan the 2007 Plan which was subsequently approved by shareholders on May 17 2007 The 2007 Plan was established to provide for grants of awards to key employees and directors of and consultants and advisors to

the Company or its affiliates who in the opinion of the Management Development and Compensation Committee of the Board of Directors MDCC are in position to make significant contributions to the success of the Company and its affiliates The 2007 Plan replaced the Companys 1997 Incentive Plan as amended the 1997 Plan and no new awards have been issued under the 1997 Plan Awards under the 2007 Plan may take the form of stock options stock appreciation rights restricted stock unrestricted stock stock

units including restricted stock units performance awards cash and other awards that are convertible Into or

otherwise based on the Companys stock maximum of 8000000 shares may be issued under the 2007

Plan subject to adjustment as provided in the 2007 Plan The 2007 Plan also contains limits with respect to

the awards that can be made to any one person Stock options granted under the 2007 Plan will be granted

with an exercise price equal to fair market value at date of grant All options expire ten years from date of

grant Awards granted under the 2007 Plan will become exercisable or vest as determined by the Administrator

of the Plan

Under the Companys 1997 Plan 16000000 shares of Class Common Stock were reserved for issuance to officers directors and key employees In addition to stock options any of the following incentives may have been awarded to participants under the 1997 Plan stock appreciation rights nonvested shares

unrestricted stock awards entitling the recipient to delivery in the future of Class Common Stock or other securities securities that are convertible into or exchangeable for shares of Class Common Stock and cash bonuses Option grants and vesting periods under the 1997 Plan were determined by the MDCC Outstanding stock options granted under the 1997 Plan were granted with an exercise price equal to fair market value at

the date of grant and became exercisable either in equal installments over three years beginning one year after

the grant date or became exercisable two years after the grant date Prior to 2007 most stock options granted under the 1997 Plan were exercisable in equal installments over four years All options expire ten years after

the grant date Upon approval of the 2007 Plan no new awards were issued under the 1997 Plan

Under our 2001 Non-Employee Directors Stock Plan as amended the 2001 Plan we reserved 400000 shares of Class Common Stock for the granting of stock options to eligible non-employee directors of the Company Under the terms of the 2001 Plan stock option grants were awarded on predetermined

59

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

formula basis Unless terminated by our Board of Directors the 2001 Plan will be in effect until all options

issued thereunder expire or are exercised The exercise price of options granted under the 2001 Plan is the fair

market value of the stock on the date of the grant Initial awards of stock options granted under the 2001 Plan

to new directors become exercisable in equal installments over three years and annual awards of options

granted under the 2001 Plan become fully exercisable one year from the date of grant and in each case expire

ten years after the grant date Stock options granted under the 2001 Plan prior to December 31 2004 became

exercisable in equal installments over four years beginning one year after the grant date and expire ten years

after the grant date

Options to purchase an aggregate of 3159713 3208571 and 3110208 shares were exercisable under

all option arrangements as of December 31 2010 2009 and 2008 respectively Under the 2007 Plan the only

Plan from which we are actively issuing equity awards there were 4423778 1153937 and 3121365 shares

available for future grants as of December 31 2010 2009 and 2008 respectively The shares available at

December 31 2010 and 2009 reflect the assumption that awards granted under the Companys 2010 and 2009

Executive Long Term Incentive Programs discussed below will be earned at the target level for performance

stock units and the maximum level for performance stock options

The Company received $4406 in proceeds on the exercise of stock options under the Companys stock

option and employee stock purchase plans and recorded tax benefit of $493 related to these stock option

exercises during the year ended December 31 2010

Shares issued upon the exercise of stock options under the Companys stock option and employee stock

purchase plans are from authorized but unissued shares of the Companys Class Common Stock

Long Term Incentive Programs

2010 Executive Long Term Incentive Program

On March 2010 the Management Development and Compensation Conmiittee 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 Companys executives and

employees On March 2010 the Board of Directors also approved the 2010 LTIP with respect to the

Companys Chief Executive Officer The 2010 LTIP was established under the Companys 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 Companys Class Comnon Stock and performance stock options PSOs with an exercise price of $19.45 the closing price of the Companys Class Common Stock as quoted on the

New York Stock Exchange on March 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 Companys Class Common

Stock and PSOs with an exercise price of $22.55 the closing price of the Companys Class 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 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 committee thereof of the achievement of the applicable performance

metric The payout of the performance awards will be based on the Companys 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 2010 through December 31 2012 and the

performance period for the PSOs is the twelve-month period from January 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

60

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

The maximum number of shares to be awarded with respect to PSUs under the 2010 LTIP is 527800

which if earned will be settled in early 2013 Based on current estimates of the likely level of achievement of

the performance metric unrecognized compensation expense with respect to the 2010 PSUs was $2463 as of

December 31 2010 This expense is expected to be recognized over weighted-average remaining period of

2.2 years

The maximum number of shares subject to exercise with respect to PSOs under the 2010 LTIP is

737640 which if earned will be settled subject to the vesting schedule noted above in early 2011 Based on

current estimates of the likely level of achievement of the performance metric unrecognized compensation

expense related to the 2010 PSOs was $2638 as of December 31 2010 This expense is expected to be

recognized over weighted-average remaining period of 2.2 years

2009 Executive Long Term Incentive Program

On March 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 Companys executives and employees On March 2009 the Board of Directors also approved the 2009 LTIP with respect to the

Companys Chief Executive Officer The 2009 LTIP was established under the Companys 2007 Incentive

Plan The awards are subject to future performance and consist of PSUs equal in value to one share of the

Companys Class Common Stock and PSOs with an exercise price of $9.34 the closing price of the

Companys Class Common Stock as quoted on the New York Stock Exchange on March 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 Companys Class Common Stock and PSOs with an exercise price of $12.93 the

closing price of the Companys Class 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 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

committee thereof of the achievement of the applicable performance metric The payout of the performance

awards will be based on the Companys 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 2009 through December 31 2011 and the performance period for the PSOs was the

twelve-month period from January 2009 through December 31 2009 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 2009 LTIP is 745000

which if earned will be settled in early 2012 Based on current estimates of the likely level of achievement of

the performance metric unrecognized compensation expense with respect to the 2009 PSUs was $1631 as of

December 31 2010 This expense is expected to be recognized over weighted-average remaining period of

1.2 years

Based on actual performance the number of shares subject to exercise with respect to PSOs under the

2009 LTIP is 599619 which shares were settled on March 2010 subject to the vesting schedule noted

above The weighted-average grant date fair value per share of PSOs granted under the 2009 LTIP for which

exercise price equals market value at the date of grant was $9.52

61

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

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

Year Ended December 31 2010 Year Ended December 31 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 Companys 2009 LTIP

and excludes the performance-based awards noted above under the 2010 LTIP for which performance

conditions have not been met

Weighted-Average

Weighted- Remaining Aggregate

Average Contractual Term Intrinsic

Shares Exercise Price Years Value

Outstanding at January 2010

Settled 599619 9.52

Exercised

Expired or forfeited 30554 9.79

Outstanding at December 31 2010 569065 $9.50 8.19 $8582

Vested or expected to vest at December 31 2010 542089 $9.50 8J8 $8178

Exercisable at December 31 2010

Unrecognized compensation expense related to the 2009 PSOs was $719 as of December 31 2010 This

expense is expected to be recognized over weighted-average remaining period of 1.6 years

2008 Executive Long Term Incentive Program

In March 2008 the MDCC approved the terms of The Timberland Company 2008 Executive Long Term Incentive Program 2008 LTIP with respect to equity awards to be made to certain Company executives and in March 2008 the Board of Directors also approved the 2008 LTIP with respect to the Companys Chief

Executive Officer The 2008 LTIP was established under the 2007 Plan The awards were based on the

achievement of certain net income goals for the Company for the twelve-month period from January 2008

through December 31 2008 with threshold budget target and maximum award values based on actual net

income of the Company for 2008 equaling or exceeding specified percentages of budgeted net income No

awards were to be made unless the threshold goal was attained and in no event could the payout exceed 150%

of the target award The total potential grant date value of the maximum awards under the 2008 LTIP was

$7500 Awards earned under the 2008 LTIP were $1453 and were paid in early 2009 The awards were

settled 60% in stock options subject to three-year vesting schedule and 40% in restricted stock subject to

two-year vesting schedule For purposes of the payout the number of shares subject to the options was based

on the value of the option as of the date of issuance using the Black-Scholes option pricing model and the

number of restricted shares issued was based on the fair market value of the Companys Class Common

Stock on the date of issuance

Other Long Term Incentive Programs

During 2010 the MDCC approved program to award cash or equity awards based upon the achievement of certain project milestones Awards will be granted upon approval of performance criteria achievement by

62

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

steering committee designated by the Board of Directors and if equity based will vest immediately upon

grant The Company expects the milestones to be achieved at various stages through 2013 The maximum

aggregate value which may be earned under the program is $2615 and the number of equity awards to be

issued if applicable will be determined based on the fair market value of the Companys Class COmmon

Stock on the date of issuance Unrecognized compensation expense related to these awards was $1748 as of

December 31 2010 and the expense is expected to be recognized over weighted-average remaining period

of 1.8 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 Companys Long Term Incentive Programs discussed above

Expected volatility is based on the historical volatility of the Companys stock

The expected term of options is estimated using the historical exercise behavior of employees and

directors The risk-free interest rate for periods within the contractual life of the option is based on the

U.S Treasury yield curve corresponding to the stock options average life

Year Ended December 31 2010 2009 2008

Expected volatility 49.0% 43.5% 32.2%

Risk-free interest rate 2.2% 2.1% 3.0%

Expected life in years 5.0 6.1 6.4

Expected dividends

The following summarizes transactions for the year ended December 31 2010 under stock option

arrangements excluding awards issued under the Companys Long Term Incentive Programs discussed above

Weighted-Average

Weighted- Remaining

Average Contractual Term Aggregate Shares Exercise Price Years Intrinsic Value

Outstanding at January 2010 3908270 $25.05

Granted 185300 20.78

Exercised 215035 15.62

Expired or forfeited 218611 26.69

Outstanding at December 31 2010 3659924 $25.29 4.66 $11275

Vested and expected to vest at

December 31 2010 3622230 $25.37 4.61 $11042

Exercisable at December 31 2010 3159713 $26.86 4.04 6693

The weighted-average grant date fair values per share of stock options granted for which exercise price

equals market value at the date of grant were $9.32 $4.39 and $5.73 for the years ended December 31 2010

2009 and 2008 respectively The total intrinsic values of stock options exercised during the years ended

December 31 2010 2009 and 2008 were $1263 $354 and $476 respectively

Total unrecognized share-based compensation expense related to nbnvested stock options was $1848 as

of December 31 2010 The cost is expected to be recognized over the weighted-average remaining period of

1.5 years

63

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

Nonvested Shares Restricted Stock and Restricted Stock Units

As noted above the Companys 1997 Plan and 2007 Plan provide for grants of nonvested shares Under

the 1997 Plan the Company generally granted restricted stock with three year vesting period which is the

same as the contractual term Under the 2007 Plan restricted stock awards will vest in equal annual

installments over two-year period and restricted stock units will vest in equal annual installments over one

to three-year period Expense is recognized over the awards requisite service period which begins on the first

day of the measurement period and ends on the last day of the vesting period The fair value of nonvested

share grants is determined by the fair market value at the date of grant

Changes in the Companys nonvested shares excluding awards under the Companys Long Term Incentive

Programs discussed above for the year ended December 31 2010 are as follows

Weighted- Weighted-

Average Grant Average Grant

Stock Awards Date Fair Value Stock Units Date Fair Value

Nonvested at January 2010 86102 $15.59 297758 $13.74

Awarded 145684 22.03

Vested 61142 18.14 161256 13.65

Forfeited ______ ______ 22194 15.69

Nonvested at December 31 2010 24960 9.34 259992 $18.27

Expected to vest at December 31 2010 24960 9.34 236862 $18.08

The total fair value of stock awards vested during the years ended December 31 2010 2009 and 2008

was $1107 $3017 and $1913 respectively Unrecognized compensation expense related to nonvested

restricted stock awards was $13 as of December 31 2010 and the expense is expected to be recognized over

weighted-average remaining period of 0.2

years The total fair value of stock units vested during the years

ended December 31 2010 and 2009 was $3148 and $618 respectively No stock units vested during 2008

Unrecognized compensation expense related to nonvested restricted stock units was $2787 as of December 31

2010 and the expense is expected to be recognized over weighted-average remaining period of 1.5 years

Employee Stock Purchase Plan

Pursuant to the terms of our 1991 Employee Stock Purchase Plan as amended the ESPP we are authorized to issue up to an aggregate of 2600000 shares of our Class Common Stock to eligible

employees electing to participate in the ESPP Eligible employees may contribute through payroll with

holdings from 2% to 10% of their regular base compensation during six-month participation periods beginning

January and July of each year At the end of each participation period the accumulated deductions are

applied toward the purchase of Class Common Stock at price equal to 85% of the market price at the

beginning or end of the participation period whichever is lower

The fair value of the ESPP purchase rights was estimated on the date of grant using the Black-Scholes

option valuation model that uses the assumptions in the following table Expected volatility is based on the

six-month participation period the options contractual and expected life The risk-free interest rate is based

on the six-month U.S Treasury rate

Year Ended December 31 2010 2009 2008

Expected volatility 47.4% 76.5% 49.6%

Risk-free interest rate 0.2% 0.3% 2.8%

Expected life in months

Expected dividends

64

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

Employee purchases totaled 76222 95337 and 87365 shares in 2010 2009 and 2008 respectively at prices ranging from $9.82 to $13.74 per share As of December 31 2010 total of 96580 shares were available for

future purchases The weighted-average fair values of the Companys ESPP purchase rights were approximately $4.54 $4.20 and $4.65 per share for the years ended December 31 2010 2009 and 2008 respectively

As of December 31 2010 there was no unrecognized compensation expense with respect to purchase rights under the ESPP

14 Business Segments and Geographic Information

The Companys reportable segments are North America Europe and Asia The composition of segments is consistent with that used by the Companys 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 years These prior year costs as well as the assets related to the U.S distribution centers have been reclassified to North America to conform to the current year 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 wholesale distributor revenue and operating income reflected in our Europe

segment in prior periods has been reclassified to Asia to conform to the current year 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 year presentation

Unallocated Corporate consists primarily of corporate finance information services legal and administra

tive expenses share-based compensation costs global marketing support expenses worldwide product devel

opment 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 expenses customer operations and service costs and credit

management costs previously reported in Unallocated Corporate were reclassified to North America Addition

ally short-term incentive compensation costs previously reported in Unallocated Corporate were reclassified to

North America Europe and Asia Unallocated Corporate also 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 accounted for as hedges and the

timing and 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 Intersegment revenues which are eliminated in consolidation are not material Total assets are disaggregated to the extent

that assets apply specifically to single segment Unallocated Corporate assets primarily consist of cash and

equivalents manufacturing/sourcing assets computers and related equipment and deferred tax assets

The following tables present the segment information as of and for the years ended December 31 2010 2009 and 2008 respectively Operating income/loss shown below for the year ended December 31 2010 includes impairment charges of $8617 and $5334 in North America and Europe respectively related to

goodwill and certain other intangible assets Operating income for North America for the year ended

65

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

December 31 2010 also includes gains related to the termination of licensing agreements of $3000 Operating

income for Europe for the years ended December 31 2009 and 2008 includes an impairment charge of $925

and $2061 respectively related to certain intangible asset See Notes and for additional information

North Unallocated

America Europe Asia Corporate Consolidated

2010

Revenue $647337 $592086 $190061 $1429484

Operating income/loss 126267 106327 30575 128885 134284

Interest income 434 434

Interest expense 538 538

Other net ________ ________ 7080 7080

Income/loss before income taxes $126267 $106327 30575 $121909 141260

Total assets $275972 $374394 97402 144591 892359

Goodwill 31964 6994 38958

Expenditures for capital additions 3058 5801 2199 8859 19917

Depreciation and amortization 6343 5157 1723 12277 25500

North Unallocated

America Europe Asia Corporate Consolidated

2009

Revenue $610164 $527979 $147733 $1285876

Operating income/loss 95699 73759 11031 103015 77474

Interest income 903 903

Interest expense 498 498

Other net ________ ________ 3506 3506

Income/loss before income taxes 95699 73759 11031 99104 81385

Total assets $248639 $353520 56552 201196 859907

Goodwill 36876 7477 44353

Expenditures for capital additions 6235 1889 1153 8400 17677

Depreciation and amortization 7018 5600 1770 14395 28783

North Unallocated

America Europe Asia Corporate Consolidated

2008

Revenue $652435 $551752 $160363 $1364550

Operating income/loss 104213 83040 3237 120854 69636

Interest income 2371 2371

Interest expense 652 652

Other net 5455 5455

Income/loss before income taxes $104213 83040 3237 $113680 76810

Total assets $273347 $267947 $115880 192225 849399

Goodwill 36876 6994 43870

Expenditures for capital additions 5039 5632 1707 9938 22316

Depreciation and amortization 7056 7382 2588 15319 32345

66

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

The following summarizes our operations in different geographic areas for the years ended December 31

2010 2009 and 2008 respectively

United Other States Europe Asia Foreign Consolidated

2010

Revenue $609484 $561233 $190556 $68211 $1429484

Long-lived assets 121455 24198 5729 4355 155737 2009

Revenue $575495 $498386 $148214 $63781 $1285876 Long-lived assets 134677 30713 4697 4580 174667 2008

Revenue $615897 $526137 $160872 $61644 $1364550 Long-lived assets 138376 35360 2347 4885 180968

Other Foreign revenue above consists of revenue in Canada the Middle East Latin America and Africa

Revenues from external customers are reflected in the geographic regions based on where the products are

sold Licensing revenue which is included in our North America reporting segment has been allocated to the

geographic regions above based on where the products are sold

Long-lived assets in the table above include property plant and equipment goodwill intangible assets

net and other assets net Other Foreign assets consist primarily of the Companys manufacturing assets in the

Caribbean

For segment reporting Canada is included in our North America segment The Middle East Latin America

and Africa are included in our Europe segment

The following summarizes our revenue by product group for the years ended December 31 2010 2009

and 2008 respectively

2010 2009 2008

Footwear $1035681 931179 974326

Apparel and accessories 368825 329071 367032

Royalty and other 24978 25626 23192

Total $1429484 $1285876 $1364550

2009 reflects reclassification adjustment of $500 between Apparel and accessories and Royalty and other

15 Retirement Plans

We maintain contributory 401k Retirement Eaings.Plan the 401k Plan for eligible U.S salaried and hourly employees who are at least 18 years of age Under the provisions of the 401k Plan employees may contribute up to 40% of their base salary up to certain limits The 401k Plan provides for Company matching contributions not to exceed 3% of the employees compensation or if less 50% of the employees contribution Vesting of our contribution begins at 25% after one year of service and increases by 25% each

year until full vesting occurs We maintain non-contributory profit sharing plan for eligible hourly employees not covered by the 401k Plan Our contribution expense under these U.S retirement plans was $1611 $1586 and $1648 in 2010 2009 and 2008 respectively

16 Commitments and Contingencies

Leases

We lease our corporate headquarters facility and other management offices manufacturing facilities retail

stores showrooms two distribution facilities and certain equipment under non-cancelable operating leases

67

THE TIMBERLAND COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

expiring at various dates through 2024 The approximate minimum rental commitments under all non-

cancelable leases as of December 31 2010 are as follows

2011 50868

2012 40316

2013 31627

2014 23966

2015 19339

Thereafter 44058

Total $210174

Most of the leases for retail space provide for renewal options contain nonnal escalation clauses and

require us to pay real estate taxes maintenance and other expenses The aggregate base rent obligation for

lease is expensed on straight-line basis over the term of the lease Base rent expense for all operating leases

was $58504 $54915 and $58338 for the years ended December 31 2010 2009 and 2008 respectively

Percentage rent based on sales levels for the years ended December 31 2010 2009 and 2008 was $9465

$8983 and $10213 respectively

Litigation

We are involved in various legal matters including litigation which have arisen in the ordinary course of

business Management believes that the ultimate resolution of any existing matter will not have material

adverse effect on our business or our consolidated financial statements In December 2008 we settled certain

litigation involving infringement of our intellectual property rights by third party which resulted in pre-tax

gain of approximately $2630

17 Selected Quarterly Financial Data Unaudited

2010 Quarter Ended Apr11 July 21 October December 3112

Amounts in Thousands Except Per Share Data

Revenue $317042 $188954 $432344 $491144

Gross profit 157983 93508 206569 238454

Net income/loss 25747 23452 52195 42132

Basic earnings/loss per share .48 .44 1.01 .83

Diluted earnings/loss per share .47 .44 1.00 .82

Net income includes pre-tax charge of $13249 and $702 in the quarters ended July and December 31

respectively associated with the impairment of certain goodwill and intangible assets See Note for addi

tional information

Net income includes $3950 cumulative adjustment to correct the tax rate applied to intercompany

nrft5

2009 Quarter Ended April July October December 31

Revenue $296648 $179702 $421766 $387760

Gross profit 136689 75508 194512 196213

Net income/loss 15877 19244 37757 22254

Basic earnings/loss per share .28 .34 .68 .40

Diluted earnings/loss per share .27 .34 .68 .40

68

ITEM CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A CONTROLS AND PROCEDURES

Managements Evaluation of Disclosure Controls and Procedures

We maintain system of disclosure controls and procedures which are designed to ensure that information

required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 the Exchange Act is recorded processed summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms These disclosure controls and procedures include

controls and procedures designed to ensure that information required to be disclosed under the federal

securities laws is accumulated and communicated to our management on timely basis to allow decisions

regarding required disclosure

Based on their evaluation our principal executive officer and principal financial officer have concluded

that our disclosure controls and procedures as defined in Rules 3a- 15e and 5d- 15e under the Exchange Act were effective as of the end of the period covered by this report

There were no changes in our internal control over financial reporting as defined in Rules 3a- 15f and 5d- 15f under the Exchange Act that occurred during the quarter ended December 31 2010 that have

materially affected or are reasonably likely to materially affect our internal control over financial reporting

Managements Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial

reporting as such term is defined in Exchange Act Rules 3a- 5f and 5d- 151 Timberlands internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial

reporting and the preparation of financial statements for external purposes in accordance with generally

accepted accounting principles

Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that

controls may become inadequate because of changes in conditions or that the degree of compliance with the

policies or procedures may deteriorate

Management assessed the effectiveness of Timberlands internal control over financial reporting as of the

end of the period covered by this report In making this assessment management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission COSO in Internal Control Integrated Framework Based on our assessment and those criteria management believes that Timberlands

internal control over financial reporting was effective as of the end of the period covered by this report

Timberlands independent registered public accounting firm has issued their report on the effectiveness of

Timberlands internal control over financial reporting which appears below

69

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of The Timberland Company

Stratham New Hampshire

We have audited the internal control over financial reporting of The Timberland Company and subsidiar

ies the Company as of December 31 2010 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission The

Companys management is responsible for maintaining effective internal control over financial reporting and

for its assessment of the effectiveness of internal control over financial reporting included in the accompany

ing Managements Annual Report on Internal Control over Financial Reporting Our responsibility is to

express an opinion on the Companys internal control over financial reporting based on our audit

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight

Board United States Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether effective internal control over financial reporting was maintained in all material

respects Our audit included obtaining an understanding of internal control over financial reporting assessing

the risk that material weakness exists testing and evaluating the design and operating effectiveness of

internal control based on the assessed risk and performing such other procedures as we considered necessary

in the circumstances We believe that our audit provides reasonable basis for our opinion

companys internal control over financial reporting is process designed by or under the supervision

of the companys principal executive and principal financial officers or persons performing similar functions

and effected by the companys board of directors management and other personnel to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for external

purposes in accordance with generally accepted accounting principles companys internal

control over

financial reporting includes those policies and procedures that pertain to the maintenance of records that

in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company

provide reasonable assurance that transactions are recorded as necessary to permit preparation

of financial

statements in accordance with generally accepted accounting principles and that receipts and expenditures of

the company are being made only in accordance with authorizations of management and directors of the

company and provide reasonable assurance regarding prevention or timely detection of unauthorized

acquisition use or disposition of the companys assets that could have material effect on the financial

statements

Because of the inherent limitations of internal control over financial reporting including the possibility of

collusion or improper management override of controls material misstatements due to error or fraud may not

be prevented or detected on timely basis Also projections of any evaluation of the effectiveness of the

internal control over financial reporting to future periods are subject to the risk that the controls may become

inadequate because of changes in conditions or that the degree of compliance with the policies or procedures

may deteriorate

In our opinion the Company maintained in all material respects effective internal control over financial

reporting as of December 31 2010 based on the criteria established in Internal ControlIntegrated

Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission

We have also audited in accordance with the standards of the Public Company Accounting Oversight

Board United States the consolidated financial statements and financial statement schedule as of and for the

year ended December 31 2010 of the Company and our report dated February 22 2011 expressed an

unqualified opinion on those financial statements and financial statement schedule

Is DELOITTE TOUCHE LLP

Boston Massachusetts

February 22 2011

70

ITEM 9B OTHER INFORMATION

None

PART III

ITEM 10 DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Please refer to the information set forth under the caption Executive Officers of the Registrant in Part

Item of this Annual Report on Form 10-K and to the information under the captions Required Votes and

Method of Tabulation Item Election of Directors Information with Respect to Nominees Corporate

Governance and Code of Ethics The Audit Committee and Section 16a Beneficial Ownership Reporting

Compliance in our definitive Proxy Statement the 2011 Proxy Statement relating to our 2011 Annual

Meeting of Stockholders that will be filed with the Securities and Exchange Commission within 120 days

after the close of our fiscal year ended December 31 2010 which information is incorporated herein by

reference

ITEM 11 EXECUTIVE COMPENSATION

Please refer to the information set forth under the captions Directors Compensation for Fiscal Year

2010 Executive Compensation and all sub-captions thereunder and Compensation Committee Interlocks

and Insider Participation in our 2011 Proxy Statement which information is incorporated herein by reference

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Please refer to the information set forth under the captions Equity Compensation Plan Information and

Security Ownership of Certain Beneficial Owners and Management in our 2011 Proxy Statement which

information is incorporated herein by reference

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Please refer to the information set forth under the captions The Audit Committee introductory

paragraph Board Independence and Certain Relationships and Related Transactions in our 2011 Proxy

Statement which information is incorporated herein by reference

ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES

Please refer to the information set forth under the captions Audit and Non-Audit Fees and Audit

Committee Pre-Approval of Audit and Non-Audit Services in our 2011 Proxy Statement which information

is incorporated herein by reference

71

PART IV

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS The following consolidated financial statements are included in

Part II Item of this Annual Report on Form 10-K and appear on the pages shown below

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31 2010 and 2009

For the years ended December 31 2010 2009 and 2008

Consolidated Statements of Income

Consolidated Statements of Changes in Stockholders Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Form 10-K Page

a2 FINANCIAL STATEMENT SCHEDULE The following additional financial data appearing on the pages shown below should be read in conjunction with the consolidated financial statements

Form 10-K Page

Schedule II Valuation and Qualifying Accounts 76

All other schedules for which provision is made in the applicable accounting regulations of the Securities

and Exchange Commission are not required under the related instructions or are inapplicable and have

therefore been omitted

EXHIBITS Listed below are the Exhibits filed or furnished as part of this report some of which are

incorporated by reference from documents we previously filed with the Securities and Exchange Commission

in accordance with the provisions of Rule 12b-32 of the Exchange Act

Exhibit Description

ARTICLES OF INCORPORATION AND BY-LAWS

3.1 Restated Certificate of Incorporation dated May 14 19878

Certificate of Amendment of Restated Certificate of Incorporation dated May 22 19878

Certificate of Ownership Merging The Nathan Company into The Timberland Company dated

July 31 19878

Certificate of Amendment of Restated Certificate of Incorporation dated June 14 20008

Certificate of Amendment of Restated Certificate of Incorporation dated September 27 20019

3.2 Amended and Restated By-Laws dated February 28 20077

INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS INCLUDING INDENTURES See also Exhibits 3.1 and 3.2

4.1 Revised specimen stock certificate for shares of The Timberland Companys Class Common

Stock14

10 MATERIAL CONTRACTS 10.1 Agreement dated as of August 29 1979 between The Timberland Company and Sidney

Swartz1

The Timberland Company 1997 Incentive Plan as amended10

The Timberland Company 1991 Employee Stock Purchase Plan as amended5

The Timberland Company 1991 Stock Option Plan for Non-Employee Directors6

Amendment No dated December 20008 10.5 The Timberland Company 2001 Non-Employee Directors Stock Plan as amended13

10.6 Summary of Compensation for Non-Management Members of the Board of Directors of The

Timberland Company effective January 20093

36

37

38

39

40

1-68

10.2

10.3

10.4

72

Exhibit Description

10.7 Second Amended and Restated Revolving Credit Agreement dated as of June 2006 among The

Timberland Company certain banks listed therein and Bank of America N.A as administrative agent11

10.8 First Amendment to the Second Amended and Restated Revolving Credit Agreement dated as of

September 2007 among The Timberland Company certain lending institutions listed therein and Bank of America N.A as lender and as administrative agent.15

10.9 The Timberland Company Deferred Compensation Plan as amended2

10.10 Amended and Restated Change of Control Severance Agreement4

10.11 The Timberland Company 2007 Executive Long Term Incentive Program16

10.12 The Timberland Company 2007 Incentive Plan as amended 2007 IP17 10.13 The Timberland Company 2008 Executive Long Term Incentive Program18

10.14 The Timberland Company 2009 Executive Long Term Incentive Program3

10.15 The Timberland Company 2010 Executive Long Term Incentive Program20

10.16 Form of Performance Stock Unit Agreement under the 2007 IP3

10.17 Form of Performance Stock Option Agreement under the 2007 IP3

10.18 Form of Non-Qualified Stock Option Agreement under the 2007 IP3

10.19 Form of Restricted Stock Unit Agreement under the 2007 IP3

10.20 Form of Restricted Stock Award Agreement under the 2007 IP3

10.21 Form of Director Restricted Stock Unit Agreement under the 2007 IP12

10.22 The Timberland Company 2004 Executive Long Term Incentive Program13

10.23 Amendment to The Timberland Company 2004 Executive Long Term Incentive Program13

10.24 Amendment to The Timberland Company 2004 Executive Long Term Incentive Program dated November 30 200519

21 SUBSIDIARIES 21.1 List of subsidiaries of the registrant filed herewith

23 CONSENT OF EXPERTS AND COUNSEL 23.1 Consent of Independent Registered Public Accounting Firm Deloitte Touche LLP filed herewith

31 RULE 13a-14a/15d 14a CERTIFICATIONS 31.1 Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of

2002 filed herewith

31.2 Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of

2002 filed herewith

32 SECTION 1350 CERTIFICATIONS 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

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

101 .INS XBRL Instance Document

101 .SCH XBRL Taxonomy Extension Schema Document

101 .CAL XBRL Taxonomy Extension Calculation Linkbase Document

101 .LAB XBRL Taxonomy Extension Label Linkbase Document

101 .PRE XBRL Taxonomy Extension Presentation Linkbase Document

101 .DEF XBRL Taxonomy Extension Definition Linkbase Document

73

We agree to furnish to the Commission upon its request copies of any omitted schedule or exhibit to any Exhibit filed herewith

Filed as an exhibit to Registration Statement on Form S-l numbered 33-14319 and incorporated herein

by reference

Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31 2007 and

incorporated herein by reference

Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended April 2009 and

incorporated herein by reference

Filed as an exhibit to the Current Report on Form 8-K filed on December 22 2008 and incorporated

herein by reference

Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended October 2009

and incorporated herein by reference

Filed on August 18 1992 as an exhibit to Registration Statement on Form S-8 numbered 33-50998 and

incorporated herein by reference

Filed as an exhibit to the Current Report on Form 8-K filed on March 2007 and incorporated herein

by reference

Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31 2000 and

incorporated herein by reference

Filed on October 26 2001 as an exhibit to Registration Statement on Form S-8 numbered 333-72248

and incorporated herein by reference

10 Filed on January 15 2004 as an exhibit to Registration Statement on Form S-8 numbered 333-111949 and incorporated herein by reference

11 Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended June 30 2006 and

incorporated herein by reference

12 Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended July 2009 and

incorporated herein by reference

13 Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31 2004 as amended and incorporated herein by reference

14 Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31 2006 filed on March 2007 and incorporated herein by reference

15 Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended September 29 2007 and incorporated herein by reference

16 Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended March 30 2007 and incorporated herein by reference

17 Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended July 2010 and

incorporated herein by reference

18 Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended March 28 2008 and incorporated herein by reference

19 Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31 2005 and incorporated herein by reference

20 Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended April 2010 and

incorporated herein by reference

74

SIGNATURES

Pursuant to the requirements of Section 13 or 15d of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized

THE TIMBERLAND COMPANY

February 22 2011 By Is JEFFREY SWARTZ

Jeffrey Swartz

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below

by the following persons on behalf of the registrant and in the capacities and on the dates indicated

__ Thie Da Is SIDNEY SWARTZ

Sidney Swartz

Is JEFFREY SWARTZ

Jeffrey Swartz

Is CARRIE TEFFNER

Carrie Teffner

Is JOHN FITZGERALD JR

John Fitzgerald Jr

Is IAN DIERY

Ian Diery

Is JOHN FITZSIMMONS

John Fitzsimmons

Is ANDRÉ HAWAUX

AndrØ Hawaux

Is VIRGINIA KENT

Virginia Kent

/s KENNETH LOMBARD

Kenneth Lombard

Is EDWARD MONEYPENNY

Edwaid Moneypenny

/s PETER MOORE

Peter Moore

Is BILL SHORE

Bill Shore

/s TERDEMA USSERY II

Terdema Ussery II

Is CARDEN WELSH

Carden Welsh

Signature

Chairman of the Board of Directors February 22 2011

President Chief Executive Officer and February 22 2011

Director Principal Executive Officer

Chief Financial Officer and Vice February 22 2011

President Principal Financial Officer

Chief Accounting Officer and Vice February 22 2011

President Corporate Controller

Principal Accounting Officer

Director February 22 2011

Director February 22 2011

Director February 22 2011

Director February 22 2011

Director February 22 2011

Director February 22 2011

Director February .22 2011

Director February 22 2011

Director February 22 2011

Senior Vice President Chief February 22 2011

Administrative Officer and Director

75

SCHEDULE II

THE TIMBERLAND COMPANY VALUATION AND QUALIFYING ACCOUNTS

Deductions

Balance at Additions Charged Write-Offs Balance at

Beginning Charged to to Other Net of End of

Description of Period Costs and Expenses Accountsa Recoveries Period

Dollars In Thousands

Allowance for doubtful accounts

Years ended

December 31 2010 $12175 1242 $645 1913 $10859

December 31 2009 14482 3224 328 5859 12175

December 31 2008 14762 7575 636 7219 14482 Sales returns and allowances

Years ended

December 31 2010 $27139 $101545 $264 99113 $29307

December 31 2009 26451 102964 365 102641 27139

December 31 2008 30003 123090 464 126178 26451

Impact of foreign exchange rate changes

76

2010 Store Locations

U.S RETAIL STORES

Cambridge Massachusetts

Natick Massachusetts

Peabody Massachusetts

Salem New Hampshire

Stratham New Hampshire

Paramus New Jersey

Garden City New York

Soho New York

White Plains New York

King of Prussia Pennsylvania

U.S FACTORY STORES

Barstow Californa

Camarillo California

Gilroy California

Mi tas Ca fornia

Ontario Ca fornia

Vacaville Ca fornia

Castle Rock Co orado

Westbrook Connecticut

Rehoboth Beach Delaware

Estero Florida

Oiando Flohda

Sunrise Florida

Commerce Georgia

Dawsonville George

Aurora II nois

Freeport Maine

Kittery Maine

Hagerstown Maryland

Hanover Maryland

Queenstown Maryland

Lee Massachusetts

Wrentham Massachusetts

Auburn Hills Mich gan

Gulfport ssissippi

Las Vegas Nevada

At antic ty New Jersey

Flemington New Jersey

Jackson New Jersey

Elizabeth New Jersey

Paramus New Jersey

Tinton Falls New Jersey

Central Valley New York

Deer Park New York

Lake George New York

Nagara Falls New York

Rverhead New York

Waterloo New York

Smithfield North Carolina

Grove City Pennsylvania

Lancaster Pennsylvana

Limer ck Pennsylvania

Pittsburgh Pennsylvan

Reading Pennsylvan

Tannersvi Pennsylvania

Gaffney South Carolina

Myrtle Beach South Carolina

North Charleston South Caro na

Sevierville Tennessee

San Marcos Texas

Leesburg Virginia

amsburg Virgnia

Woodbridge Virginia

Pleasant Prairie Wisconsin

INTERNATIONAL RETAIL STORES

Vienna Austria

Antwerp Belgium

Hong Kong China

Bast France

Lyon France

Paris France

Berlin Germany

Co ogne Germany

Dusseldorf Germany

Frankfut Germany

Hamburg Germany

Munich Germany

Stuttgart Germany

Milan Italy

Tur Italy

Chrba Japan

Fukuoka Japan

Hirosh ma Japan

Hokkaido Japan

Kanagawa Japan

Miyagi Japan

Nagoya Japan

Niigata Japan

shrnomiya Japan

Osaka Japan

Tochigi Japan

Tokyo Japan

Wakayama Japan

Kuala Lumpur Malays

Selangor Ma aysia

Singapore

Madrid Spain

Chiayi Taiwan

Kaoshiung Tawan

Hs Chu Taiwan

Tachung Ta wan

Tainan Taiwan

Tarpe Taiwan 02

Taoyuan Taiwan

Amste veen The Nether ands

Den Haag The Netherlands

Lerdsestraat The Netherlands

Maastricht The Netherlands

Rotterdam The Nether ends

ngel The Nether ends

Utrecht The Netherlands

Birm ngham United Kingdom

Bristol United Kngdom

Cardigan Unted Kingdom

Cardiff Un ted Kingdom

Glasgow Unted Kingdom

Liverpool United Kingdom

London United Kingdom 01

Manchester United ngdom

Trafford Un ted Kingdom

Reading Un ted Kingdom

Sheffie United Kingdom

INTERNATIONAL FACTORY STORES

Parndoff Austria

Ham ng China

Shanghai China

LaVallee France

Ba erbrunr Germany

lngolstadt Germany

Metzinger Germany

Wertheim Germany

lung Chung Hong Kong

Pero Ita

Serravalle Italy

Grfu Japan

Hokkaido Japan

Kanagawa Japan

Mie Japan

Nagano Japan

Osaka Japan

Saga Japan

Shizuoka Japan

Tochigi Japan

Singapore

Barce ona Spain

Madrid Spa

Jbongli Taiwan

Kaohsuing Taiwan

Tarchung Taiwan

Taipei Taiwan

Taoyuan Ta wan

Roemond The Netherlands

cester United Kingdom

Ellesmere Port United Kingdom

Clarks Village United Kingdom

Portsmouth United Kingdom

Swindon United ngdom

York Unted Kingdom

As of 12/31/2010

78 trees preserved

4t çe fort he future

d2olbeweterberne

wesfenef crested

32877 sellers weefeweterflnweeved

3837 lbs solid

weste net genereted

7f 62 lbs net ereenhoute

octet prevented

65361600 sIde

erergp net cersumed

444 plentlrg t62 trees

2387 lbs gheeeetsiets

3.0 berrels hsel

uruted