Wolverine World Wide (WWW)

NET EARNINGS
As a result of the revenue, gross margin and expense changes discussed above, the Company achieved net earnings of $74.5 million compared to $65.9 million in 2004, an increase of $8.6 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company continued to strengthen its balance sheet in 2006. Cash of $108.3 million was generated from operating activities in 2006. Accounts receivable decreased 2.9% on a 7.6% revenue gain, while reducing the accounts receivable days' sales outstanding from the prior year by 2.0%. Inventory levels were up 14.2% at year end and inventory turns increased by 5.9% in comparison to the prior year.

The increase in accounts payable was attributed to the timing of inventory purchases from contract suppliers. The increase in other accrued liabilities was primarily attributable to adjustments made for foreign currency forward exchange contracts, an increase in employee benefit accruals, an increase in profit-sharing accruals, timing of royalty payments and an increase in taxes payable.

The majority of capital expenditures were for information system enhancements, consumer-direct initiatives, distribution equipment and building improvements. The Company leases machinery, equipment and certain warehouse, office and retail store space under operating lease agreements that expire at various dates through 2023.

The Company has a long-term revolving credit agreement that expires in July 2010 and allows for borrowings up to $150.0 million. The revolving credit facility is used to support working capital requirements. No amounts were outstanding under the revolving credit facility at December 30, 2006 or December 31, 2005. The Company was in compliance with all debt covenant requirements at December 30, 2006 and December 31, 2005. Proceeds from the existing credit facility along with cash flows from operations are expected to be sufficient to meet capital needs in the foreseeable future. Any excess cash flows from operating activities are expected to be used to purchase property, plant and equipment, pay down existing debt, fund internal and external growth initiatives, pay dividends or repurchase the Company's common stock.

The decrease in debt was the result of annual principal payments on the Company's senior notes. The Company had commercial letter-of-credit facilities outstanding of $2.8 million and $2.9 million at the end of 2006 and 2005, respectively. The total debt to total capital ratio for the Company was 4.1% in 2006 and 6.6% in 2005.

The Company's pension benefit results are based upon actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected returns on plan assets. The Company is required to consider market conditions, including changes in interest rates, in selecting these assumptions. Pre-tax expense resulting from the Company's qualified defined benefit pension plans increased $.8 million for 2006 when compared to 2005 primarily due to the change in actuarial assumptions for purposes of estimating participant mortality.  For 2006, the Company adopted the provision of SFAS No. 158 requiring the recognition of the funded status of pension plans on its balance sheet.  As a result, the Company recorded a net reduction of $13.1 million within the accumulated other comprehensive income component of stockholders' equity, a reduction to net assets of $12.3 million and an increase to net liabilities of $1.6 million.  This adjustment had no impact on the net earnings or cash flows of the Company. The Company estimates that pre-tax expense related to qualified defined benefit pension plans will decrease in 2007 as compared to 2006 by approximately $4.1 million primarily as a result of the reduction in the amortization of prior market value losses and a discount rate increase.  This estimate is based on the expected early adoption of the measurement date provision of SFAS No. 158 in 2007, which requires the use of the Company's year end as its pension plan measurement date beginning for the 2008 expense determination.  The Company previously used September 30 as its measurement date. 

Applying the provisions of SFAS No. 87 and SFAS No. 132, the Company's qualified defined benefit pension plans (the "Plans") were overfunded by $9.6 million in 2006 and $11.1 million in 2005. Under the Employee Retirement Income Security Act of 1974, the Plans had no minimum funding requirements for 2006 and 2005. Discretionary cash contributions were made to the Plans totaling $3.0 million in 2006 and $3.1 million in 2005 to provide long-term stability to the Plans. The Company expects to contribute approximately $3.0 million to its qualified defined benefit pension plans and approximately $.9 million to the Supplemental Executive Retirement Plan (SERP) in 2007.

In the fourth quarter and full year 2006 results, the Company recognized a one-time net income tax benefit of $1.5 million resulting from the closure of prior year income tax audits.  In 2005, the Company elected to repatriate earnings of foreign subsidiaries as provided under the American Jobs Creation Act of 2004 (the "Act"), which provided for a tax deduction of 85% of certain foreign earnings that were repatriated in 2005. During the fourth quarter of fiscal 2005, the Company repatriated foreign earnings of $41.5 million and, as a result, recorded a related tax expense of $1.4 million.  No provision has been made for U.S. federal and state income taxes or foreign taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries of $125.3 million at December 30, 2006 ($89.2 million at December 31, 2005) as the Company expects such earnings will remain invested overseas indefinitely.

The Company's Board of Directors has approved common stock repurchase programs each authorizing the repurchase of 3.0 million shares of common stock over a 24-month period. The primary purpose of these stock repurchase programs is to increase shareholder value. The Company intends to continue repurchasing shares of its common stock in open market or privately negotiated transactions, from time-to-time, depending upon market conditions and other factors.

The Company declared dividends of $16.5 million in 2006, or $.30 per share, which was a 15.4% increase on a per share basis over the $14.5 million, or $.26 per share, declared in 2005. On February 8, 2007, the Company declared a quarterly cash dividend of $.09 per share of common stock, an increase of 20.0% as compared to the same period of 2006. The quarterly dividend is payable on May 1, 2007, to shareholders of record on April 2, 2007.

On June 6, 2005, the Company announced an exclusive global footwear licensing agreement for Patagonia® Footwear, with the initial product introduction debuting in Spring 2007.

During the second quarter of 2005, the Company purchased the remaining 5% ownership from the minority stockholder of Wolverine Europe Limited for a purchase price of $2.3 million, making it a wholly-owned subsidiary. The transaction eliminated the minority interest of $.6 million and resulted in goodwill of $1.8 million.

On January 3, 2005, the Company expanded its owned Cat® and Wolverine® Footwear operations in Canada. This expansion allowed the Company to directly wholesale all of its major brands in Canada. Assets consisting primarily of inventory, fixed assets and amortizable intangible assets totaling $2.1 million and assumed liabilities of $.8 million were acquired from a former Wolverine® and Cat® Footwear distributor for $2.3 million in cash and resulted in goodwill and intangible assets of approximately $1.0 million. Consolidated pro forma revenue and net earnings, assuming the transaction occurred at the beginning of 2005, were not materially different from reported amounts. Pursuant to SFAS No. 142, goodwill and indefinite-lived intangibles will not be amortized, but will be evaluated for impairment annually. Goodwill was assigned to the Company's branded footwear and licensing segment. The amortizable intangible assets have a weighted average useful life of approximately ten years.

On January 3, 2005, the Company expanded its owned Merrell® operations into Sweden and Finland and its Sebago® operations into the U.K. and Germany. Assets consisting primarily of inventory totaling approximately $.5 million were acquired from former distributors for cash.

These acquisitions are discussed further in Note 11 to the consolidated financial statements.

In early October 2006, the European Commission announced definitive anti-dumping duties at rates of 16.5% and 10.0% on imports from China and Vietnam, respectively. These definitive measures became effective October 7, 2006 and will remain in effect until October 6, 2008. The imposition of these anti-dumping measures could have a material impact on the Company's business, results of operations and financial condition.