Wolverine World Wide Form 10-Q - 07/27/06

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the second twelve week accounting period ended June 17, 2006

OR

[  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         

Commission File Number: 001-06024

WOLVERINE WORLD WIDE, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware


 

38-1185150


(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

 

 

 

9341 Courtland Drive, Rockford, Michigan


 

49351


(Address of Principal Executive Offices)

 

(Zip Code)


 

(616) 866-5500


 

 

(Registrant's Telephone Number, Including Area Code)

 

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

Yes    X          No       

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer     X        Accelerated filer ___     Non-accelerated filer ___

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

Yes               No    X  

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

There were 60,122,476 shares of Common Stock, $1 par value, outstanding as of July 21, 2006, of which 4,705,797 shares are held as Treasury Stock.




FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the footwear business, worldwide economics and the Company itself including, without limitation, statements regarding timing or acceptance of new products, anticipated sell-throughs, future progress toward achieving the Company's strategic growth plan, estimated tax rate, the use of excess cash flows, future revenues, earnings and marketing, statements in Part I, Item 2 regarding the overview, the Company's financial condition, liquidity and capital resources and statements in Part I, Item 3 regarding market risk. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "should," "will," variations of such words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Risk Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.

Risk Factors include, but are not limited to, uncertainties relating to changes in demand for the Company's products; changes in consumer preferences or spending patterns; the cost and availability of inventories, services, labor and equipment furnished to the Company; the cost and availability of contract manufacturers; the cost and availability of raw materials, including leather and petroleum based materials; changes in planned consumer demand or at-once orders; customer order cancellations; the impact of competition and pricing by the Company's competitors; changes in government and regulatory policies; foreign currency fluctuation in valuations compared to the U.S. dollar; changes in monetary controls and valuations of the Chinese yuan renminbi and the relative value to the U.S. dollar; changes in duty structures in countries of import and export; provisional anti-dumping measures in Europe that have been implemented by the European Commission with respect to leather footwear imported into the European Union from China and Vietnam at additional duty rates progressing to 19.4% and 16.8%, respectively, by September of 2006 for certain leather footwear and the result of final measures proposed by the European Commission; anti-dumping measures being considered with respect to safety footwear imported from China and India; changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments; technological developments; changes in local, domestic or international economic and market conditions; the size and growth of footwear markets; service interruptions at shipping and receiving ports; changes in the amount or severity of inclement weather; changes due to the growth of Internet commerce; popularity of particular designs and categories of footwear; the ability of the Company to manage and forecast its growth and inventories; the ability to secure and protect trademarks, patents and other intellectual property; integration of operations of newly acquired businesses; changes in business strategy or development plans; the Company's ability to adapt and compete in global apparel and accessory markets; customer acceptance of the Patagonia® Footwear products to be introduced in 2006; the ability to attract and retain qualified personnel; the ability to retain rights to brands licensed by the Company; loss of significant customers; relationships with international distributors and licensees; the Company's ability to meet at-once orders; the exercise of future purchase options by the U.S. Department of Defense on previously awarded contracts; the risk of doing business in developing countries and economically volatile areas; retail buying patterns; consolidation in the retail sector; and the acceptability of U.S. brands in international markets. Additionally, concerns regarding acts of terrorism, the war in Iraq and subsequent 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. These matters are representative of the Risk Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement; additional Risk Factors are identified in the Company's Form 10-K filed March 15, 2006. Historical operating results are not necessarily indicative of the results that may be expected in the future. The Risk Factors included here are not exhaustive. Other Risk Factors exist, and new Risk Factors emerge from time-to-time, that may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Furthermore, the Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.


2


PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets
(Thousands of dollars)

 

June 17,
2006
(Unaudited)


 

December 31,
2005
(Audited)


 

June 18,
2005
(Unaudited)


 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

     Cash and cash equivalents

$

81,024

 

$

85,258

 

$

74,779

 

     Accounts receivable, less allowances

 

 

 

 

 

 

 

 

 

          June 17, 2006 - $11,147

 

 

 

 

 

 

 

 

 

          December 31, 2005 - $8,729

 

 

 

 

 

 

 

 

 

          June 18, 2005 - $7,892

 

169,519

 

 

157,119

 

 

157,252

 

     Inventories:

 

 

 

 

 

 

 

 

 

          Finished products

 

167,733

 

 

140,729

 

 

168,712

 

          Raw materials and work in process

 


18,884


 

 


20,618


 

 


21,347


 

 

 

186,617

 

 

161,347

 

 

190,059

 

     Other current assets

 


21,407


 

 


17,024


 

 


15,279


 

TOTAL CURRENT ASSETS

 

458,567

 

 

420,748

 

 

437,369

 

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

 

 

     Gross cost

 

269,902

 

 

264,631

 

 

258,006

 

     Less accumulated depreciation

 


179,605


 

 


171,429


 

 


165,420


 

 

 

90,297

 

 

93,202

 

 

92,586

 

OTHER ASSETS

 

 

 

 

 

 

 

 

 

     Goodwill and other non-amortizable intangibles

 

46,184

 

 

43,971

 

 

44,967

 

     Other

 


68,257


 

 


68,659


 

 


69,963


 

 

 


114,441


 

 


112,630


 

 


114,930


 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS


$


663,305


 

$


626,580


 

$


644,885


 





See notes to consolidated condensed financial statements


3


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets - Continued
(Thousands of dollars, except share data)


 

June 17,
2006
(Unaudited)


 

December 31,
2005
(Audited)


 

June 18,
2005
(Unaudited)


 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

     Notes payable

$

-

 

$

-

 

$

1,000

 

     Accounts payable

 

61,843

 

 

41,107

 

 

51,035

 

     Accrued salaries and wages

 

11,922

 

 

17,510

 

 

10,924

 

     Other accrued liabilities

 

48,312

 

 

34,448

 

 

39,972

 

     Current maturities of long-term debt

 


10,730


 

 


10,972


 

 


10,735


 

TOTAL CURRENT LIABILITIES

 

132,807

 

 

104,037

 

 

113,666

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (less current maturities)

 

21,467

 

 

21,439

 

 

32,159

 

Other non-current liabilities

 

38,624

 

 

38,783

 

 

37,098

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

     Common Stock - par value $1, authorized

 

 

 

 

 

 

 

 

 

          160,000,000 shares; shares issued

 

 

 

 

 

 

 

 

 

          (including shares in treasury):

 

 

 

 

 

 

 

 

 

               June 17, 2006 - 60,085,355 shares

 

 

 

 

 

 

 

 

 

               December 31, 2005 - 59,211,814 shares

 

 

 

 

 

 

 

 

 

               June 18, 2005 - 58,830,200 shares

 

60,085

 

 

59,212

 

 

58,830

 

     Additional paid-in capital

 

21,830

 

 

13,203

 

 

5,757

 

     Retained earnings

 

478,263

 

 

452,672

 

 

414,770

 

     Accumulated other comprehensive income

 

12,803

 

 

9,398

 

 

14,298

 

     Unearned compensation

 

-

 

 

(5,873

)

 

(7,353

)

     Cost of shares in treasury:

 

 

 

 

 

 

 

 

 

          June 17, 2006 - 4,700,133 shares

 

 

 

 

 

 

 

 

 

          December 31, 2005 - 3,082,548 shares

 

 

 

 

 

 

 

 

 

          June 18, 2005 - 1,155,464 shares


 


(102,574


)


 


(66,291


)


 


(24,340


)


TOTAL STOCKHOLDERS' EQUITY

 


470,407


 

 


462,321


 

 


461,962


 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

     STOCKHOLDERS' EQUITY


$


663,305


 

$


626,580


 

$


644,885


 



(  ) - Denotes deduction
See notes to consolidated condensed financial statements


4


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Operations
(Thousands of dollars, except share data)
(Unaudited)

 

12 Weeks Ended


 

24 Weeks Ended


 

 

June 17,
2006


 

June 18,
2005


 

June 17,
2006


 

June 18,
2005


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

238,457

 

$

215,706

 

$

501,296

 

$

460,880

 

Cost of products sold


 


148,052


 

 


131,252


 

 


305,016


 

 


280,021


 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

90,405

 

 

84,454

 

 

196,280

 

 

180,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses


 


68,737


 

 


64,243


 

 


144,984


 

 


136,398


 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

21,668

 

 

20,211

 

 

51,296

 

 

44,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses/(income):

 

 

 

 

 

 

 

 

 

 

 

 

     Interest expense

 

675

 

 

890

 

 

1,324

 

 

1,723

 

     Interest income

 

(646

)

 

(409

)

 

(1,186

)

 

(723

)

     Other - net


 


331


 

 


120


 

 


465


 

 


(14


)


 

 


360


 

 


601


 

 


603


 

 


986


 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE INCOME TAXES

 

21,308

 

 

19,610

 

 

50,693

 

 

43,475

 

Income taxes


 


7,074


 

 


6,353


 

 


16,830


 

 


14,086


 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS


$


14,234


 

$


13,257


 

$


33,863


 

$


29,389


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

     Basic


$


.26


 

$


.23


 

$


.62


 

$


.52


 

     Diluted


$


.25


 

$


.22


 

$


.59


 

$


.49


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share


$


.075


 

$


.065


 

$


.150


 

$


.130


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used for net earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

     computation:

 

 

 

 

 

 

 

 

 

 

 

 

          Basic

 

54,863,744

 

 

56,606,556

 

 

55,001,089

 

 

56,733,516

 

          Diluted

 

56,785,209

 

 

59,157,254

 

 

56,992,900

 

 

59,408,147

 




See notes to consolidated condensed financial statements


5


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Consolidated Condensed Statement of Stockholders' Equity
(Thousands of dollars, except share data)
(Unaudited)

 

24 Weeks
Ended


 

 

June 17,
2006


 

 

 

 

 

COMMON STOCK

 

 

 

     Balance at beginning of the year

$

59,212

 

     Common stock issued under stock incentive plans

 


873


 

     Balance at end of the quarter


$


60,085


 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL

 

 

 

     Balance at beginning of the year

$

13,203

 

     Stock-based compensation expense

 

3,336

 

     Reversal of unearned compensation upon adoption of SFAS No. 123(R)

 

(5,873

)

     Amounts associated with common stock issued under stock incentive plans

 

11,273

 

     Net change in notes receivable

 


(109


)


     Balance at end of the quarter


$


21,830


 

 

 

 

 

RETAINED EARNINGS

 

 

 

     Balance at beginning of the year

$

452,672

 

     Net earnings

 

33,863

 

     Cash dividends declared


 


(8,272


)


     Balance at end of the quarter


$


478,263


 


 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME

 

 

 

     Balance at beginning of the year

$

9,398

 

     Foreign currency translation adjustments

 

5,585

 

     Change in fair value of foreign currency cash flow hedges, net of taxes


 


(2,180


)


     Balance at end of the quarter


$


12,803


 

 

 

 

 

UNEARNED COMPENSATION

 

 

 

     Balance at beginning of the year

$

(5,873

)

     Reversal of unearned compensation upon adoption of SFAS No. 123(R)


 


5,873


 

     Balance at end of the quarter


$


-


 

 

 

 

 

COST OF SHARES IN TREASURY

 

 

 

     Balance at beginning of the year

$

(66,291

)

     Repurchase of common stock for treasury (1,627,450 shares)

 

(36,494

)

     Issuance of treasury shares (9,865 shares)


 


211


 

     Balance at end of the quarter


$


(102,574


)


 

 

 

 

TOTAL STOCKHOLDERS' EQUITY AT END OF THE QUARTER


$


470,407


 


See notes to consolidated condensed financial statements


6


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows
(Thousands of dollars)
(Unaudited)


 

24 Weeks Ended


 

 

June 17,
2006


 

June 18,
2005


 

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

     Net earnings

$

33,863

 

$

29,389

 

     Adjustments necessary to reconcile net earnings to net cash
        provided by operating activities:

 

 

 

 

 

 

     Depreciation

 

9,126

 

 

8,824

 

     Amortization

 

300

 

 

196

 

     Deferred income taxes

 

241

 

 

30

 

     Stock-based compensation expense

 

3,336

 

 

1,561

 

     Excess tax benefits from stock-based compensation

 

(2,864

)

 

-

 

     Pension

 

1,550

 

 

1,036

 

     Other

 

(4,741

)

 

3,135

 

     Changes in operating assets and liabilities:

 

 

 

 

 

 

          Accounts receivable

 

(10,009

)

 

(8,391

)

          Inventories

 

(21,264

)

 

(8,516

)

          Other assets

 

(4,118

)

 

8,962

 

          Accounts payable and other liabilities


 


28,083


 

 


1,647


 

 

 

 

 

 

 

 

Net cash provided by operating activities   

 

33,503

 

 

37,873

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

     Business acquisitions

 

-

 

 

(4,468

)

     Additions to property, plant and equipment

 

(5,925

)

 

(7,185

)

     Other


 


6


 

 


379


 

 

 

 

 

 

 

 

Net cash used in investing activities   

 

(5,919

)

 

(11,274

)

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

     Proceeds from long-term debt

 

36,934

 

 

15,720

 

     Payments of long-term debt

 

(37,148

)

 

(15,729

)

     Cash dividends paid

 

(7,787

)

 

(7,492

)

     Purchase of common stock for treasury

 

(36,494

)

 

(22,789

)

     Proceeds from shares issued under stock incentive plans

 

8,557

 

 

8,012

 

     Excess tax benefits from stock-based compensation


 


2,864


 

 


-


 

 

 

 

 

 

 

 

Net cash used in financing activities   

 

(33,074

)

 

(22,278

)

Effect of foreign exchange rate changes


 


1,256


 

 


(1,714


)


 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(4,234

)

 

2,607

 

Cash and cash equivalents at beginning of the period


 


85,258


 

 


72,172


 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD


$


81,024


 

$


74,779


 

(  ) - Denotes reduction in cash and cash equivalents
See notes to consolidated condensed financial statements


7


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements
June 17, 2006 and June 18, 2005

1.  Summary of Significant Accounting Policies

NATURE OF OPERATIONS
Wolverine World Wide, Inc. (NYSE: WWW) is a leading designer, manufacturer and marketer of a broad line of quality casual shoes, performance outdoor footwear, work shoes and boots, uniform shoes and boots, constructed slippers and moccasins. The Company's global portfolio of owned and licensed brands includes: Bates®, CAT® Footwear, Harley-Davidson® Footwear, Hush Puppies®, HYTEST®, Merrell®, Patagonia® Footwear, Sebago®, Stanley® Footgear and Wolverine®. Apparel and licensing programs are utilized to extend the Company's owned brands into product categories beyond footwear. The Company also operates a retail division to showcase its brands and branded footwear from other manufacturers, a tannery that produces Wolverine® Performance Leathers™ and a pigskin procurement operation.

BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete presentation of the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included in the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

REVENUE RECOGNITION
Revenue is recognized on the sale of products manufactured or sourced by the Company when the related goods have been shipped, legal title has passed to the customer and collectibility is reasonably assured. Revenue generated through programs with licensees and distributors involving products bearing the Company's trademarks is recognized as earned according to stated contractual terms upon either the purchase or shipment of branded products by licensees and distributors.

The Company records provisions against gross revenue for estimated stock returns and cash discounts in the period when the related revenue is recorded. These estimates are based on factors that include, but are not limited to, historical stock returns, historical discounts taken and analysis of credit memorandum activity.

COST OF PRODUCTS SOLD
Cost of products sold for the Company's operations include the actual product costs, including inbound freight charges, purchasing, sourcing, inspection and receiving costs. Warehousing costs are included in selling and administrative expenses.

SEASONALITY
The Company's business is subject to seasonal influences and has twelve weeks in each of the first three quarters and sixteen or seventeen weeks in the fourth quarter. Both factors can cause significant differences in revenue, earnings and cash flows from quarter to quarter; however, the differences have followed a consistent pattern in previous years.

RECLASSIFICATIONS
Certain prior period amounts on the consolidated condensed financial statements have been reclassified to conform to current period presentation. These reclassifications did not affect net earnings.


8


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

2.  Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

 

12 Weeks Ended


 

24 Weeks Ended


 

 

June 17,
2006


 

June 18,
2005


 

June 17,
2006


 

June 18,
2005


 

Weighted average shares outstanding

55,663,330

 

57,695,342

 

55,829,825

 

57,843,763

 

Adjustment for nonvested restricted
    common stock



(799,586



)



(1,088,786



)



(828,736



)



(1,110,247



)


Denominator for basic earnings per share

54,863,744

 

56,606,556

 

55,001,089

 

56,733,516

 

Effect of dilutive stock options

1,522,836

 

1,827,830

 

1,562,814

 

1,895,538

 

Adjustment for nonvested restricted
    common stock - treasury method


398,629


 


722,868


 


428,997


 


779,093


 

Denominator for diluted earnings per share


56,785,209


 

59,157,254


 

56,992,900


 

59,408,147


 

Options to purchase 688,656 and 1,065,165 shares of common stock for the 12 and 24 weeks ended June 17, 2006 and 572,912 and 444,846 shares for the 12 and 24 weeks ended June 18, 2005 have not been included in the denominator for the computation of diluted earnings per share because the related exercise prices were greater than the average market price for the period and, therefore, they were anti-dilutive.

3.  Goodwill and Other Non-Amortizable Intangibles

The changes in the net carrying amounts of goodwill and trademarks are as follows (thousands of dollars):

 

Goodwill


 

Trademarks


 

Total


 

Balance at June 18, 2005

$

36,726

 

$

8,241

 

$

44,967

 

    Intangibles acquired

 

-

 

 

106

 

 

106

 

    Purchase accounting adjustments

 

224

 

 

-

 

 

224

 

    Foreign currency translation effects


 


(1,326


)


 


-


 

 


(1,326


)


Balance at December 31, 2005

 

35,624

 

 

8,347

 

 

43,971

 

    Intangibles acquired

 

-

 

 

405

 

 

405

 

    Foreign currency translation effects

 


1,808


 

 


-


 

 


1,808


 

Balance at June 17, 2006


$


37,432


 

$


8,752


 

$


46,184


 

4.  Comprehensive Income

Comprehensive income represents net earnings and any revenue, expenses, gains and losses that, under accounting principles generally accepted in the United States, are excluded from net earnings and recognized directly as a component of stockholders' equity.

The ending accumulated other comprehensive income is as follows (thousands of dollars):

 

June 17,
2006


 

December 31,
2005


 

June 18,
2005


 

Foreign currency translation adjustments

$

17,828

 

$

12,243

 

$

16,592

 

Foreign currency cash flow hedge adjustments, net of taxes

 

(1,572

)

 

608

 

 

570

 

Minimum pension liability adjustments, net of taxes


 


(3,453


)


 


(3,453


)


 


(2,864


)


Accumulated other comprehensive income


$


12,803


 

$


9,398


 

$


14,298


 


9


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

The reconciliation from net earnings to comprehensive income is as follows (thousands of dollars):

 

12 Weeks Ended


 

24 Weeks Ended


 

 

June 17,
2006


 

June 18,
2005


 

June 17,
2006


 

June 18,
2005


 

Net earnings

$

14,234

 

$

13,257

 

$

33,863

 

$

29,389

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

    Foreign currency translation adjustments

 

6,616

 

 

(3,453

)

 

5,585

 

 

(7,195

)

    Change in fair value of foreign currency
        cash flow hedges, net of taxes


 



(1,838



)



 



1,185


 


 



(2,180



)



 



2,047


 

Comprehensive income


$


19,012


 

$


10,989


 

$


37,268


 

$


24,241


 

5.  Business Segments

The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories to the retail sector, including casual shoes, dress shoes, performance outdoor footwear, boots, uniform shoes, work shoes, slippers, moccasins and apparel and accessories. Revenue of this segment is derived from the sale of branded footwear to external customers as well as royalty income from the licensing of the Company's trademarks and brand names to licensees and distributors. The business units comprising the branded footwear and licensing segment manufacture or source, market and distribute products in a similar manner. Branded footwear and licensed products are distributed through wholesale channels and under licensing and distributor arrangements.

The other business units in the following table consist of the Company's retail, tannery and pigskin procurement operations. The Company operated 76 domestic retail stores and 13 consumer-direct internet sites at June 17, 2006, that sell Company-manufactured and sourced products, as well as footwear manufactured by unaffiliated companies. The other business units distribute products through retail and wholesale channels.

There have been no material changes in the way the Company measures segment profits or in its basis of determining business segments.

Business segment information is as follows (thousands of dollars):

 

Branded
Footwear
and
Licensing





 




Other
Businesses





 





Corporate





 





Consolidated


 

 

12 Weeks Ended June 17, 2006


 

Revenue

$

209,757

 

$

28,700

 

$

-

 

$

238,457

 

Intersegment revenue

 

7,513

 

 

794

 

 

-

 

 

8,307

 

Earnings (loss) before income taxes

 

21,391

 

 

2,954

 

 

(3,037

)

 

21,308

 

 

 


 


 


 


 


 


 


 


 


 


 


 

 

24 Weeks Ended June 17, 2006


 

Revenue

$

454,327

 

$

46,969

 

$

-

 

$

501,296

 

Intersegment revenue

 

17,890

 

 

1,643

 

 

-

 

 

19,533

 

Earnings (loss) before income taxes

 

56,053

 

 

2,452

 

 

(7,812

)

 

50,693

 


10


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

 

Branded
Footwear
and
Licensing





 




Other
Businesses





 





Corporate





 





Consolidated


 

 

12 Weeks Ended June 18, 2005


 

Revenue

189,560

 

$

26,146

 

$

-

 

$

215,706

 

Intersegment revenue

 

6,061

 

 

487

 

 

-

 

 

6,548

 

Earnings (loss) before income taxes

 

19,217

 

 

2,529

 

 

(2,136

)

 

19,610

 

 

 


 

 

24 Weeks Ended June 18, 2005


 

Revenue

417,728

 

$

43,152

 

$

-

 

$

460,880

 

Intersegment revenue

 

15,786

 

 

1,194

 

 

-

 

 

16,980

 

Earnings (loss) before income taxes

 

47,770

 

 

1,879

 

 

(6,174

)

 

43,475

 

6.  Financial Instruments and Risk Management

The Company's financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts and notes payable and long-term debt. The Company's estimate of the fair values of these financial instruments approximates their carrying amounts at June 17, 2006. Fair value was determined using discounted cash flow analyses and current interest rates for similar instruments. The Company does not hold or issue financial instruments for trading purposes.

The Company follows Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138, which requires that all derivative instruments be recorded on the consolidated condensed balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated with foreign currency inventory purchases made by non-U.S. wholesale operations in the normal course of business. At June 17, 2006 and June 18, 2005, foreign exchange contracts with a notional value of $61,428,000 and $53,555,000, respectively, were outstanding to purchase various currencies (principally U.S. dollars) with maturities ranging up to 252 days. These contracts have been designated as cash flow hedges. As of June 17, 2006 and June 18, 2005, a liability of $1,667,000 and an asset of $1,033,000, respectively, have been recognized for the fair value of the foreign exchange contracts.

The fair value of the foreign currency forward exchange contracts represents the estimated receipts or payments necessary to terminate the contracts. Hedge effectiveness is evaluated by the hypothetical derivative method. Any hedge ineffectiveness is reported within the cost of products sold caption of the consolidated condensed statements of operations. Hedge ineffectiveness was not material to the consolidated condensed financial statements for the quarters ended June 17, 2006 and June 18, 2005. If, in the future, the foreign exchange contracts are determined to be ineffective hedges or terminated before their contractual termination dates, the Company would be required to reclassify into earnings all or a portion of the unrealized amounts related to the cash flow hedges that are currently included in accumulated other comprehensive income within stockholders' equity.

The Company does not generally require collateral or other security on trade accounts and notes receivable.



11


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

7.  Stock-Based Compensation

The Company has stock-based incentive plans, which are described below. Awards issued under these stock-based incentive plans are designed to align the interests of management and stockholders, reward executives and other key employees for building stockholder value and encourage long-term investment in the Company by participating executives.

VALUATION AND EXPENSE INFORMATION UNDER SFAS NO. 123(R) AND PRO FORMA INFORMATION

Prior to January 1, 2006, the Company followed Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, in accounting for its stock incentive plans. The Company did not recognize stock-based compensation expense related to employee stock options in its statements of operations for periods prior to the adoption of SFAS No. 123(R), Share-Based Payment, as options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective transition method. Under that transition method, compensation cost recognized in the 12 and 24 weeks ended June 17, 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimate in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results of prior periods have not been restated.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company's earnings before income taxes for the 12 and 24 weeks ended June 17, 2006 are $835,000 and $1,233,000 lower, respectively, than if it had continued to account for stock-based compensation under APB Opinion No. 25. The Company's net earnings for the 12 and 24 weeks ended June 17, 2006 are lower by $613,000, or $.01 per basic share and $.01 per diluted share, and $934,000, or $.02 per basic share and $.02 per diluted share, respectively.

The Company recognized compensation costs of $1,623,000 and $3,336,000, respectively, and related income tax benefits of $472,000 and $988,000, respectively, for its stock-based compensation plans in the statements of operations for the 12 and 24 weeks ended June 17, 2006. Compensation costs capitalized as part of inventory and property, plant and equipment were not material.

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $2,864,000 excess tax benefit classified as a financing cash inflow would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123(R).

Effective December 13, 2005, the Board of Directors accelerated the vesting of nonvested stock options previously granted to employees and officers of the Company under its various stock-based incentive plans. As a result of this action, options to purchase approximately 1,003,000 shares of common stock that otherwise would have vested in 2006, 2007 and 2008 became fully vested and an additional $4,407,000 of pro forma stock-based compensation expense was recognized in the quarter ended December 31, 2005. Accordingly, compensation costs of $2,185,000, $1,495,000 and $727,000 in 2006, 2007 and 2008, respectively, that would have been recognized in each year after the adoption of SFAS No. 123(R) will not be recognized due to the modification. The decision to accelerate the vesting of these options, which the Company believes to be in the best interests of its stockholders, was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following the Company's adoption of SFAS No. 123(R).


12


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

Pro forma information regarding net earnings and earnings per share has been determined as if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock awards for all periods presented. For purposes of pro forma disclosures, the estimated fair values of stock options are amortized to expense over the related vesting periods and awards subject to acceleration of vesting upon retirement are recognized over the explicit service period up to the date of actual retirement. The Company's pro forma information under SFAS No. 123 is as follows (thousands of dollars, except per share data):

 

12 Weeks Ended


 

24 Weeks Ended


 

June 18,
2005


 

June 18,
2005


Net earnings, as reported

$

13,257

 

 

$

29,389

 

Add:  Total stock-based employee

 

 

 

 

 

 

 

          compensation expense included in reported

 

 

 

 

 

 

 

          net income, net of related tax effects

 

689

 

 

 

1,578

 

Deduct:  Total stock-based employee

 

 

 

 

 

 

 

          compensation expense determined under

 

 

 

 

 

 

 

          fair value method for all awards,

 

 

 

 

 

 

 

          net of related tax effects

 


1,053


 


 

 


2,257


 


Pro forma net earnings

$


12,893


 


 

$


28,710


 


 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

   Basic - as reported

$

.23

 

 

$

.52

 

   Basic - pro forma

 

.23

 

 

 

.51

 

 

 

 

 

 

 

 

 

   Diluted - as reported

 

.22

 

 

 

.49

 

   Diluted - pro forma

 

.22

 

 

 

.48

 

The Company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. The estimated weighted-average fair value for each option granted during the 24 weeks ended June 17, 2006 and June 18, 2005 was $5.25 and $5.10 per share, respectively, with the following weighted-average assumptions:

 

 

 


 

 

 


 

 

12 Weeks Ended


 

 

24 Weeks Ended


 

 

June 17,

 

June 18,

 

 

June 17,

 

June 18,

 

 

2006


 

2005


 

 

2006


 

2005


Expected market price volatility (1)

 

25.1%

 

24.3%

 

 

24.4%

 

23.9%

Risk-free interest rate (2)

 

4.9%

 

3.9%

 

 

4.6%

 

3.8%

Dividend yield (3)

 

1.2%

 

1.1%

 

 

1.4%

 

1.1%

Expected term (4)

 

4 years

 

4 years

 

 

4 years

 

4 years


(1)

Based on historical volatility of the Company's common stock. The expected volatility is based on the daily percentage change in the price of the stock over four years.

(2)

Represents the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.

(3)

Represents the Company's cash dividend yield for the expected term.

(4)

Represents the period of time that options granted are expected to be outstanding. The Company determined that all employee groups exhibit similar exercise and post-vesting termination behavior to determine the expected term.

Stock-based compensation expense recognized in the consolidated condensed statements of operations for the 12 and 24 weeks ended June 17, 2006 has been reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. In the Company's pro forma information required under SFAS No. 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred. The cumulative effect of the change in accounting for forfeitures was not material.


13


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

EMPLOYEE STOCK-BASED INCENTIVE PLANS

As of June 17, 2006, the Company had stock options outstanding or available for grant under stock incentive plans adopted in 1988, 1993, 1995, 1997, 1999, 2001, 2003 and 2005. Shares of restricted stock may also be granted under each of these plans, with the exception of the 1988 and 1993 plans. As of June 17, 2006, the Company had approximately 3,916,000 stock incentive units available for issuance under the Stock Incentive Plan of 2005. Under the provisions of the Stock Incentive Plan of 2005, each option granted counts as one stock incentive unit and each share of restricted stock granted counts as two stock incentive units. In addition, as of June 17, 2006, the Company had approximately 498,000 stock incentives available for grant under the balance of its other plans. Options granted under each plan have an exercise price equal to the fair market value of the underlying stock on the grant date, expire no later than ten years from the grant date and generally vest over three years. Common stock issued under these plans is subject to certain restrictions, including a prohibition against any sale, transfer or other disposition by the officer or employee during the vesting period (except for certain transfers for estate planning purposes for certain officers) and a requirement to forfeit all or a certain portion of the award upon certain terminations of employment or upon failure to achieve performance criteria in certain instances. These restrictions lapse over a three- to five-year period from the date of the award. The Company has elected to recognize expense for these stock-based incentive plans ratably over the vesting term on a straight-line basis. Certain option and restricted share awards provide for accelerated vesting under various scenarios, including retirement and upon a change in control of the Company. With regard to acceleration of vesting upon retirement, employees of eligible retirement age are vested on a pro rata basis over the twelve month period following the date of grant in accordance with plan provisions. The Company issues shares to plan participants upon exercise or vesting of stock-based incentive awards from either authorized, but unissued, shares or treasury shares.

A summary of the transactions under the stock option plans is as follows:






 




Shares
Under
Option



Weighted-
Average
Exercise
Price


Average
Remaining
Contractual
Term
(years)


Aggregate
Intrinsic
Value
(thousands of
dollars)


Outstanding at December 31, 2005

5,040,712

 

$

14.72   

 

 

 

Granted

696,628

 

 

22.53   

 

 

 

Exercised

(724,938

)

 

11.22   

 

 

 

Cancelled


(17,403


)


 


18.70   


 


 


 


Outstanding at June 17, 2006


4,994,999


 


$


16.30   


6.0


$


33,937


Estimated forfeitures


(10,963


)


 


 


 


 


 


Vested or expected to vest at June 17, 2006


4,984,036


 


$


16.29   


6.0


$


33,930


Nonvested at June 17, 2006 and expected to vest


(650,337


)


 


 


 


 


 


Exercisable at June 17, 2006


4,333,699


 


$


15.36   


5.5


$


33,524


The total pre-tax intrinsic value of options exercised during the 12 and 24 weeks ended June 17, 2006 was $5,844,000 and $8,937,000, respectively. As of June 17, 2006, there was $2,678,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized over a weighted-average period of 1.2 years.

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company's closing stock price of $23.09 as of June 17, 2006, which would have been received by the option holders had all option holders exercised in-the-money options as of that date. The total number of in-the-money options exercisable as of June 17, 2006 was 4,300,571. As of December 31, 2005, 5,040,712 outstanding options were exercisable, and the weighted-average exercise price was $14.72.


14


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

A summary of the nonvested restricted shares issued under stock award plans is as follows:




 




Shares


Weighted-Average
Grant Date
Fair Value


Nonvested at December 31, 2005

934,266

 

$

14.28

 

Granted

174,800

 

 

22.47

 

Vested

(308,955

)

 

12.00

 

Forfeited


(4,700


)


 


17.32


 


Nonvested at June 17, 2006


795,411


 


$


16.95


 


As of June 17, 2006, there was $7,711,000 of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under restricted stock award plans. That cost is expected to be recognized over a weighted-average period of 1.8 years. The total fair value of shares vested during the 12 and 24 weeks ended June 17, 2006 was $381,000 and $6,877,000, respectively.

8.  Pension Expense

A summary of net pension and SERP (Supplemental Executive Retirement Plan) costs recognized by the Company is as follows (thousands of dollars):

 

12 Weeks Ended


 

24 Weeks Ended


 

 

June 17,
2006


 

June 18,
2005


 

June 17,
2006


 

June 18,
2005


 

Service cost pertaining to benefits

 

 

 

 

 

 

 

 

 

 

 

 

   earned during the period

$

(1,114

)

$

(989

)

$

(2,227

)

$

(1,977

)

Interest cost on projected benefit obligations

 

(2,339

)

 

(2,185

)

 

(4,678

)

 

(4,371

)

Expected return on pension assets

 

2,971

 

 

2,780

 

 

5,942

 

 

5,560

 

Net amortization loss

 

(1,860


)


 

(1,805


)


 

(3,721


)


 

(3,610


)


Net pension cost

$


(2,342


)


$


(2,199


)


$


(4,684


)


$


(4,398


)


9.  Litigation and Contingencies

The Company is involved in various environmental claims and other legal actions arising in the normal course of business. The environmental claims include sites where the Environmental Protection Agency has notified the Company that it is a potentially responsible party with respect to environmental remediation. These remediation claims are subject to ongoing environmental impact studies, assessment of remediation alternatives, allocation of costs between responsible parties and concurrence by regulatory authorities and have not yet advanced to a stage where the Company's liability is fixed. However, after taking into consideration legal counsel's evaluation of all actions and claims against the Company, management is currently of the opinion that their outcome will not have a material effect on the Company's consolidated financial position or future results of operations.

Pursuant to certain of the Company's lease agreements, the Company has provided financial guarantees to third parties in the form of indemnification provisions. These provisions indemnify and reimburse third parties for costs, including but not limited to adverse judgments in lawsuits, taxes and operating costs. The terms of the guarantees are identical to the terms of the related lease agreements. The Company is not able to calculate the maximum potential amount of future payments it could be required to make under these guarantees, as the potential payments are dependent upon the occurrence of future unknown events.


15


WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements - continued
June 17, 2006 and June 18, 2005

The Company has future minimum royalty obligations due under the terms of certain licenses held by the Company. These minimum future obligations on licenses are as follows (thousands of dollars):

 


2006


2007


2008


2009


2010


Thereafter


 


Minimum royalties

$

1,176

$

1,139

$

1,063

$

1,329

$

1,545

$

1,773

 

Minimum royalties are based on both fixed obligations and assumptions related to the consumer price index. Royalty obligations in excess of minimum requirements are based upon future sales levels. In accordance with these agreements, the Company incurred royalty expense of $1,656,000 and $1,450,000 for the first two quarters of 2006 and 2005, respectively.

The terms of certain license agreements also require advertising expenditures based on the level of sales. In accordance with these agreements, the Company's advertising obligations, based on actual sales, totaled $868,000 and $811,000 for the first two quarters of 2006 and 2005, respectively.

10.  Business Acquisitions

During the second quarter of 2005, the Company purchased the remaining 5% ownership from the minority stockholder of Wolverine Europe Limited, making it a wholly-owned subsidiary. The purchase price was $2,322,000, of which $407,000 was deferred until July 1, 2006. The transaction eliminated the minority interest of $566,000 and resulted in goodwill of $1,756,000.

On January 3, 2005, the Company converted its CAT® and Wolverine® businesses in Canada from a non-affiliated distributor-based operation to a Company-owned wholesale operation. 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 $2,117,000 and assumed liabilities of $883,000 were acquired from a former Wolverine® and CAT® Footwear distributor for cash of $2,280,000 and resulted in goodwill and intangible assets of $1,046,000. 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 majority of the goodwill is expected to be deductible for tax purposes. The amortizable intangible assets have a weighted average useful life of approximately ten years.

On January 3, 2005, the Company converted its Merrell® operations in Sweden and Finland and its Sebago® operations in the United Kingdom and Germany from a non-affiliated distributor-based operation to a Company-owned wholesale operation. Assets consisting primarily of inventory totaling $544,000 were acquired from former distributors for cash.

11. New Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. This interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company expects the adoption of FIN 48 will not have a material impact on its financial statements.


16


ITEM 2.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

OVERVIEW
Wolverine World Wide, Inc. (the "Company") has a strategic vision - "To Excite Consumers Around the World with Innovative Footwear and Apparel that Bring Style to Purpose".   To reach this vision, the Company continues to focus on the tenets of product innovation, global expansion, brand development, service excellence and community service with the end goal of delivering superior shareholder returns. There is also continued focus on the financial growth initiatives of achieving mid-to-upper single digit average annual revenue growth, creating operating leverage and maximizing working capital turnover to extract value from the Company's balance sheet.

The following financial performance highlights of the second quarter of 2006 compared to the second quarter of 2005 and year-to-date comparisons reflect these strategies:

 

Record revenue for the 16th consecutive quarter totaling $238.5 million, a 10.5% increase over the second quarter of 2005 revenue of $215.7 million.

 

 

 

 

Earnings per share during the second quarter of 2006 grew to $.25 per share compared to $.22 per share for the same quarter in the prior year, an increase of 13.6% which marks the eighth consecutive quarter of double digit earnings per share improvement.

 

 

 

 

The rate of earnings per share growth continues to exceed the revenue growth rate by a factor of two, which the Company believes signifies continued solid operating leverage year-to-date.

 

 

 

 

Return on equity year-to-date of 17% improved 100 basis points over the same period of 2005.

 

 

 

 

Accounts receivable growth rate of 7.8% in the second quarter compared to second quarter of 2005 remains below the 10.5% increase in revenue.

 

 

 

 

Inventory levels were reduced by $3.4 million, a 1.8% reduction over the same quarter last year.

 

 

 

 

Continued investment spending on the Merrell® Apparel and Patagonia® Footwear initiatives totaled $2.5 million year-to-date.

 

 

 

 

The Company's cash position remained strong with $81.0 million of cash on hand at quarter end and debt outstanding of $32.2 million.




17


The following is a discussion of the Company's results of operations and liquidity and capital resources for the second quarter of 2006. This section should be read in conjunction with the consolidated condensed financial statements and notes.

Results of Operations - Comparison of the 12 Weeks Ended June 17, 2006 (2006 Second Quarter) to the 12 Weeks Ended June 18, 2005 (2005 Second Quarter)

Financial Summary - 2006 Second Quarter versus 2005 Second Quarter


 


2006


2005


Change


 


$


 


%


 


$


 


%


 


$


 


%


 


(Millions of dollars, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

209.8

 

88.0%

 

$

189.68.2

 

87.9%

 

$

20.2

 

10.7%

 

   Other business units


 


28.7


 


12.0%


 


 


26.1


 


12.1%


 


 


2.6


 


9.8%


 


Total revenue


$


238.5


 


100.0%


 


$


215.7


 


100.0%


 


$


22.8


 


10.5%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

80.2

 

38.2%

 

$

75.1

 

39.6%

 

$

5.1

 

6.7%

 

   Other business units


 


10.2


 


35.7%


 


 


9.4


 


35.8%


 


 


0.8


 


9.5%


 


Total gross margin


$


90.4


 


37.9%


 


$


84.5


 


39.2%


 


$


5.9


 


7.0%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

$

68.7

 

28.8%

 

$

64.3

 

29.8%

 

$

4.4

 

7.0%

 

Interest expense-net

 

-

 

0.0%

 

 

0.5

 

0.2%

 

 

(0.5

)

(94.0%

)

Other expense-net

 

0.4

 

0.1%

 

 

0.1

 

0.1%

 

 

0.3

 

175.8%

 

Earnings before income taxes

 

21.3

 

8.9%

 

 

19.6

 

9.1%

 

 

1.7

 

8.7%

 

Net earnings

 

14.2

 

6.0%

 

 

13.3

 

6.1%

 

 

0.9

 

7.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

.25

 

 

 

$

.22

 

 

 

$

.03

 

13.6%

 

The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Within the branded footwear and licensing segment, the Company has identified five operating units, consisting of the Outdoor Group (comprised of the Merrell®, Sebago® and Patagonia® Footwear brands) the Wolverine Footwear Group (comprised of the Wolverine®, HYTEST®, Bates® and Stanley® Footgear brands and certain private label branded products), the Heritage Brands Group (comprised of CAT® Footwear and Harley-Davidson® Footwear), The Hush Puppies Company, and Other Branded Footwear. The Company's other business units consist of Wolverine Retail and Wolverine® Leathers (comprised of the tannery and procurement operations). The following is supplemental information on total revenue:

Total Revenue - Second Quarter


 


2006


2005


Change


 


$


%


$


%


$


%


(Millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

   Outdoor Group

$

80.9

33.9%

$

70.2

32.5%

$

10.7

 

15.3%

 

   Wolverine Footwear Group

 

62.1

26.0%

 

54.5

25.3%

 

7.6

 

13.8%

 

   Heritage Brands Group

 

37.8

15.9%

 

33.3

15.5%

 

4.5

 

13.4%

 

   The Hush Puppies Company

 

28.8

12.1%

 

30.0

13.9%

 

(1.2

)

(3.8%

)

   Other Branded Footwear


 


0.2


0.1%


 


1.6


0.7%


 


(1.4


)


(88.0%


)


Total branded footwear and licensing revenue

$

209.8

88.0%

$

189.6

87.9%

$

20.2

 

10.7%

 

   Other business units


 


28.7


12.0%


 


26.1


12.1%


 


2.6


 


9.8%


 


Total revenue


$


238.5


100.0%


$


215.7


100.0%


$


22.8


 


10.5%


 


REVENUE
Revenue of $238.5 million for the second quarter of 2006 exceeded the prior year second quarter by $22.8 million. Increases in unit volume, changes in product mix and changes in selling price for the branded footwear and licensing operations as discussed below contributed $19.7 million of the revenue increase. Of the $19.7 million revenue increase, $8.3 million was attributed to the conversion of an international distributor from a royalty arrangement to a wholesale operation, which also required recognition of sales and cost of products sold in the second quarter of 2006. The impact of translating foreign denominated revenue to U.S. dollars increased revenue

18


by $.5 million. The other business units contributed $2.6 million to the increase. International revenue increased in the quarter to account for 31.8% of total revenue in 2006 as compared to 30.6% in 2005.

The Outdoor Group recorded revenue of $80.9 million for the second quarter of 2006, a $10.7 million increase over the second quarter of the prior year. Merrell® accounted for $10.5 million of the increase over the prior year, reporting particular strength in the trail running and multi-sport categories. Merrell® was also recognized by being named Footwear Brand of the Year by the Drapers Record in the U.K. The Sebago® brand realized a $.2 million sales increase from the second quarter of 2005 as consumers responded favorably to the refocused product line. Included in the increase was $5.1 million related to the change in the international distributor arrangement mentioned above.

The Wolverine Footwear Group recorded $62.1 million in revenue for the second quarter of 2006, a $7.6 million increase from the second quarter of 2005. The Wolverine® boot business realized an increase in revenue of $3.2 million during the second quarter of 2006 compared to the second quarter of 2005, which was driven by strong consumer demand for Wolverine's core work boot product. The Bates® uniform footwear business also realized an increase in revenue of $4.5 million due to a combination of higher demand from the Department of Defense, an increase in civilian uniform footwear customers and increased exports to Europe and the Middle East. The Stanley® Footgear business and the private label business realized a $.3 million revenue decrease during the second quarter of 2006.

The Heritage Brands Group experienced a $4.5 million increase in revenue during the second quarter of 2006 compared to the second quarter of 2005. CAT® Footwear's revenue increased $2.5 million, with $.7 of the increase primarily due to stronger sales from major accounts and growing distribution in the U.S. International revenue increased by $3.6 million, with $3.2 million of the increase attributable to the international distributor arrangement mentioned above. This increase was partially offset by a decline in Canada and Europe of approximately $1.8 million in comparison to the second quarter of 2005. Harley-Davidson® Footwear revenue increased $2.0 million in the quarter driven largely by the success of new dealer exclusive product introductions and focused dealer marketing support programs.

The Hush Puppies Company recorded revenue of $28.8 million in the second quarter of 2006, a $1.2 million decrease from the second quarter of 2005. The decrease was primarily attributable to lower sales in the U.S. resulting from reduced close-out and discount channel sales as well as lower slipper division sales. Revenue from the Canadian and U.K. wholesale markets and international licensing was essentially flat for the quarter.

Within the Company's other business units, Wolverine Retail reported a $.9 million increase in revenue as a result of a same-store revenue increase of 3.1% and four additional stores operating as compared to the prior year's second quarter. Wolverine Retail operated 76 retail stores at the end of second quarter 2006 compared to 72 at the end of second quarter 2005. The Wolverine® Leathers operation reported a $1.7 million increase in revenue primarily due to increased demand for its proprietary products.

GROSS MARGIN
The gross margin of 37.9% for the second quarter of 2006 was a 130 basis point decrease from the second quarter of 2005. The change in the distributor relationship mentioned above had a negative impact on gross margin of 140 basis points. Business mix for the quarter improved gross margin by 20 basis points, which was partially offset by product cost increases which had a 10 basis point negative impact. Foreign currency impact on gross margin was neutral as the positive impact in the Canadian wholesale and Dominican Republic manufacturing operations offset the negative impact of a stronger U.S. dollar in the European wholesale operations.

SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses of $68.7 million for the second quarter of 2006 increased $4.4 million from $64.3 million for the second quarter of 2005. The Company invested approximately $1.5 million in product development and selling and administrative costs on the Merrell® Apparel and Patagonia® Footwear initiatives during the quarter. Selling and administrative expenses for the second quarter of 2006 also included incremental stock-based compensation costs of $.8 million as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R). The remaining increases related primarily to selling and distribution costs which vary with the increase in revenue.

STOCK-BASED COMPENSATION
Prior to January 1, 2006, the Company followed Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its stock incentive plans. The Company did

19


not recognize stock-based compensation expense related to employee stock options in its statements of operations for periods prior to the adoption of SFAS No. 123(R), Share-Based Payment, as options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective transition method. Under that transition method, compensation cost recognized in the 12 weeks ended June 17, 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimate in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results of prior periods have not been restated.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company's earnings before income taxes and net earnings for the 12 weeks ended June 17, 2006 were $.8 million and $.6 million lower, respectively, than if it had continued to account for stock-based compensation under APB Opinion No. 25. Basic and diluted earnings per share for the 12 weeks ended June 17, 2006 were $.01 and $.01 lower, respectively, due to the adoption of SFAS No. 123(R).

Effective December 13, 2005, the Board of Directors accelerated the vesting of nonvested stock options previously granted to employees and officers of the Company under its various stock-based incentive plans. As a result of this action, options to purchase approximately 1.0 million shares of common stock that otherwise would have vested in 2006, 2007 and 2008 became fully vested and an additional $4.4 million of pro forma stock-based compensation expense was recognized in the quarter ended December 31, 2005. Accordingly, compensation costs of $2.2 million, $1.5 million and $.7 million in 2006, 2007 and 2008, respectively, that would have been recognized in each year after the adoption of SFAS No. 123(R) will not be recognized due to the modification. The decision to accelerate the vesting of these options, which the Company believes to be in the best interests of its stockholders, was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following the Company's adoption of SFAS No. 123(R).

The Company provides compensation benefits to employees and non-employee directors under various stock-based incentive plans, including stock options and restricted shares of the Company's common stock.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatility is based on historical volatility of the Company's common stock. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The Company utilizes historical data to estimate option exercise and employee termination behavior within the valuation model. The Company determined that all employee groups exhibit similar exercise and post-vesting termination behavior to determine the expected term.

The Company has elected to recognize expense for these stock-based incentive plans ratably over the vesting term on a straight-line basis. Certain option and restricted share awards provide for accelerated vesting under various scenarios, including retirement and upon a change in control of the Company. With regard to acceleration of vesting upon retirement, employees of eligible retirement age are vested on a pro rata basis over the twelve month period following the date of grant in accordance with plan provisions.

As of June 17, 2006, there was $10.4 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under stock-based incentive plans. That cost is expected to be recognized over a weighted-average period of 1.6 years.

INTEREST, OTHER & TAXES
The net decrease in interest expense reflected lower average outstanding amounts on senior notes and lower working capital borrowings during the quarter, as well as interest income from invested cash.

The change in other income/expense primarily related to the change in realized gains or losses on foreign denominated assets and liabilities.

The Company's second quarter 2006 effective tax rate was 33.2% compared to 32.4% for the second quarter of 2005. The change in the effective tax rate related primarily to increased income from higher taxed jurisdictions, the tax impact of stock option expensing under SFAS No. 123(R) and the expiration of the research and development tax credit. 


20


NET EARNINGS
As a result of the revenue, gross margin and expense changes discussed above, the Company achieved net earnings of $14.2 million for the second quarter of 2006 as compared to $13.3 million in the second quarter of 2005, an increase of $.9 million.

Results of Operations - Comparison of the 24 Weeks Ended June 17, 2006 (First Two Quarters of 2006) to the 24 Weeks Ended June 18, 2005 (First Two Quarters of 2005)

Financial Summary - First Two Quarters of 2006 versus First Two Quarters of 2005


 


2006


2005


Change


 


$


 


%


 


$


 


%


 


$


 


%


 


(Millions of dollars, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

454.3

 

90.6%

 

$

417.7

 

90.6%

 

$

36.6

 

8.8%

 

   Other business units


 


47.0


 


9.4%


 


 


43.2


 


9.4%


 


 


3.8


 


8.8%


 


Total revenue


$


501.3


 


100.0%


 


$


460.9


 


100.0%


 


$


40.4


 


8.8%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Branded footwear and licensing

$

179.6

 

39.5%

 

$

165.8

 

39.7%

 

$

13.8

 

8.4%

 

   Other business units


 


16.7


 


35.4%


 


 


15.1


 


35.0%


 


 


1.6


 


10.1%


 


Total gross margin


$


196.3


 


39.2%


 


$


180.9


 


39.2%


 


$


15.4


 


8.5%


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

$

145.0

 

28.9%

 

$

136.4

 

29.6%

 

$

8.6

 

6.3%

 

Interest expense-net

 

0.1

 

0.0%

 

 

1.0

 

0.2%

 

 

(0.9

)

(86.2%

)

Other expense-net

 

0.5

 

0.1%

 

 

-

 

-

 

 

0.5

 

3,421.4%

 

Earnings before income taxes

 

50.7

 

10.1%

 

 

43.5

 

9.4%

 

 

7.2

 

16.6%

 

Net earnings

 

33.9

 

6.8%

 

 

29.4

 

6.4%

 

 

4.5

 

15.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

.59

 

 

 

$

.49

 

 

 

$

.10

 

20.4%

 

The following is supplemental information on total revenue:

Total Revenue - First Two Quarters


 


2006


2005


Change


 


$


%


$


%


$


%


(Millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

   Outdoor Group

$

181.4

36.2%

$

159.4

34.6%

$

22.0

 

13.8%

 

   Wolverine Footwear Group

 

118.4

23.6%

 

111.5

24.2%

 

6.9

 

6.2%

 

   Heritage Brands Group

 

80.4

16.0%

 

72.6

15.7%

 

7.8

 

10.8%

 

   The Hush Puppies Company

 

72.6

14.5%

 

71.7

15.6%

 

0.9

 

1.2%

 

   Other Branded Footwear


 


1.5


0.3%


 


2.5


0.5%


 


(1.0


)


(41.1%


)


Total branded footwear and licensing revenue

$

454.3

90.6%

$

417.7

90.6%

$

36.6

 

8.8%

 

   Other business units


 


47.0


9.4%


 


43.2


9.4%


 


3.8


 


8.8%


 


Total revenue


$


501.3


100.0%


$


460.9


100.0%


$


40.4


 


8.8%


 


REVENUE
The revenue increase for the first two quarters of 2006 was $40.4 million, with the majority of the increase resulting from strong consumer acceptance of the Spring product. Increases in unit volume, changes in product mix and changes in selling price for the branded footwear and licensing operations as discussed below contributed $40.2 million of the revenue increase. Of the $40.2 million revenue increase, $8.3 million was attributed to the conversion of an international distributor from a royalty arrangement to a wholesale operation, which also required recognition of sales and cost of products sold. The impact of translating foreign denominated revenue to U.S. dollars reduced revenue by $3.6 million. The other business units contributed $3.8 million to the increase. International revenue increased on a year-to-date basis to account for 33.9% of total revenue in 2006 as compared to 32.1% in 2005.

The Outdoor Group reported a $22.0 million revenue increase for the first two quarters of 2006 as compared to the first two quarters of 2005. The Merrell® business realized a $23.8 million increase over prior year as year-to-date increases were achieved across all geographic locations due to continued consumer response to the Spring


21


product lines. The Sebago® brand realized a $1.8 million sales decrease for the first two quarters of 2006 in comparison to the first two quarters of 2005. The sales decrease was primarily a result of lower than anticipated shipments to U.S. retailers and international distributors as retailers were cautious on their Spring commitments. The change in the international distributor arrangement mentioned above contributed $5.1 million to the increase.

The Wolverine Footwear Group recorded a $6.9 million increase in revenue for the first two quarters of 2006 as compared to the first two quarters of 2005. The Wolverine® boot business realized an increase in revenue of $2.3 million due to strong customer demand and strong reorder activity on the Wolverine MultiShoxTM comfort technology product. Increased year-to-date results were recognized in the Bates® uniform footwear business, which realized a $6.3 million increase in revenue due to improved sales to the civilian sector as well as higher demand from the Department of Defense. The Stanley® Footgear business realized a $1.7 million revenue decrease year-to-date in comparison to the first two quarters of 2005 while the private label business remained flat.

The Heritage Brands Group experienced a $7.8 million increase in revenue during the first two quarters of 2006. CAT® Footwear's revenue increased $5.0 million due to strong business results in the U.S., Canada and continental Europe. Improved sell-through results have been experienced through the introduction of expanded product campaigns including the Legendary RAW and iTechnologyTM collections. The change in the international distributor arrangement mentioned above contributed $3.2 million to the increase. Harley-Davidson® Footwear revenue increased $2.8 million year-to-date driven largely by increased shipments to the Harley-Davidson® dealer network.

The Hush Puppies Company recorded a $.9 million increase in revenue for the first two quarters of 2006. The increase was driven by higher volume generated by international licensees as well as increased wholesale shipments in the Canadian market. A $1.9 million year-to-date revenue increase in Canada was primarily the result of strong consumer demand for the Spring product offering. The increase was offset by a $1.0 million decrease in the U.S. for the first two quarters related to decreased close-out and discount channel sales. The U.K. market remained flat for the first two quarters of 2006 in comparison to the first two quarters of 2005.

Within the Company's other business units, Wolverine Retail reported a $1.4 million increase in revenue as a result of a same-store revenue increases of 2.2% for the first two quarters of 2006 as well as the addition of four stores as compared to the first two quarters of 2005. The Wolverine® Leathers operation reported a $2.4 million increase in revenue primarily due to increased demand for products.

The Company ended the second quarter of 2006 with an order backlog over 8% above the level recorded at the end of the second quarter of 2005.

GROSS MARGIN
The gross margin percentage for the first two quarters of 2006 of 39.2% was unchanged in comparison to the same period of the prior year. The change in business mix had a positive 40 basis point impact on gross margin and foreign currency contributed a 20 basis point increase. These improvements were offset by the international distributor business model change noted above.

SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $8.6 million for the first two quarters of 2006 as compared to the first two quarters of 2005. The Company invested approximately $2.5 million in product development and selling and administrative costs on the Merrell® Apparel and Patagonia® Footwear initiatives during the first half of the year. Selling and administrative expenses for the first two quarters of 2006 also included incremental stock-based compensation costs of $1.2 million as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R). Additionally, the Company realized an increase in profit sharing of $.7 million as a result of improved earnings. Partially offsetting these increases, the impact of translating foreign denominated operating expense to U.S. dollars decreased total expense by $.9 million in the second quarter of 2006. The remaining increases related primarily to selling and distribution costs which vary with the increase in revenue.

STOCK-BASED COMPENSATION
Prior to January 1, 2006, the Company followed Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its stock incentive plans. The Company did not recognize stock-based compensation expense related to employee stock options in its statements of operations for periods prior to the adoption of SFAS No. 123(R), Share-Based Payment, as options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective transition


22


method. Under that transition method, compensation cost recognized in the 24 weeks ended June 17, 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimate in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results of prior periods have not been restated.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company's earnings before income taxes and net earnings for the 24 weeks ended June 17, 2006 were $1.2 million and $.9 million lower, respectively, than if it had continued to account for stock-based compensation under APB Opinion No. 25. Basic and diluted earnings per share for the 24 weeks ended June 17, 2006 were $.02 and $.02 lower, respectively, due to the adoption of SFAS 123(R).

Effective December 13, 2005, the Board of Directors accelerated the vesting of nonvested stock options previously granted to employees and officers of the Company under its various stock-based incentive plans. As a result of this action, options to purchase approximately 1.0 million shares of common stock that otherwise would have vested in 2006, 2007 and 2008 became fully vested and an additional $4.4 million of pro forma stock-based compensation expense was recognized in the quarter ended December 31, 2005. Accordingly, compensation costs of $2.2 million, $1.5 million and $.7 million in 2006, 2007 and 2008, respectively that would have been recognized in each year after the adoption of SFAS No. 123(R) will not be recognized due to the modification. The decision to accelerate the vesting of these options, which the Company believes to be in the best interests of its stockholders, was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following the Company's adoption of SFAS No. 123(R).

The Company provides compensation benefits to employees and non-employee directors under various stock-based incentive plans, including stock options and restricted shares of the Company's common stock.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatility is based on historical volatility of the Company's common stock. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The Company utilizes historical data to estimate option exercise and employee termination behavior within the valuation model. The Company determined that all employee groups exhibit similar exercise and post-vesting termination behavior to determine the expected term.

The Company has elected to recognize expense for these stock-based incentive plans ratably over the vesting term on a straight-line basis. Certain option and restricted share awards provide for accelerated vesting under various scenarios, including retirement and upon a change in control of the Company. With regard to acceleration of vesting upon retirement, employees of eligible retirement age are vested on a pro rata basis over the twelve month period following the date of grant in accordance with plan provisions.

As of June 17, 2006, there was $10.4 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under stock-based incentive plans. That cost is expected to be recognized over a weighted-average period of 1.6 years.

INTEREST, OTHER & TAXES
The net decrease in interest expense reflected lower average outstanding amounts on senior notes and lower working capital borrowings during the first two quarters, as well as interest income from invested cash.

The change in other income/expense primarily related to the change in realized gains or losses on foreign denominated assets and liabilities.

The Company's effective tax rate for the first two quarters of 2006 was 33.2% compared to 32.4% for the first two quarters of 2005. The change in the effective tax rate related primarily to increased income from higher taxed jurisdictions, the tax impact of stock option expensing under SFAS No. 123(R) and the expiration of the research and development tax credit.  The estimated annual effective tax rate for fiscal 2006 is 33.2%.

NET EARNINGS
As a result of the revenue, gross margin and expense changes discussed above, the Company achieved net earnings of $33.9 million for the first two quarters of 2006 as compared to $29.4 million in the first two quarters of 2005, an increase of $4.5 million.


23


LIQUIDITY AND CAPITAL RESOURCES


 

 

 

 

Change from



 


June 17,
2006


December 31,
2005


June 18,
2005


December 31,
2005


June 18,
2005


(Millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

81.0

 

$

85.3

 

$

74.8

 

$

(4.3

)

$

6.2

 

Accounts receivable

 

169.5

 

 

157.1

 

 

157.3

 

 

12.4

 

 

12.2

 

Inventories

 

186.6

 

 

161.3

 

 

190.1

 

 

25.3

 

 

(3.5

)

Accounts payable

 

61.8

 

 

41.1

 

 

51.0

 

 

20.7

 

 

10.8

 

Other accrued liabilities

 

60.2

 

 

51.9

 

 

50.9

 

 

8.3

 

 

9.3

 

Debt

 

32.2

 

 

32.4

 

 

43.9

 

 

(0.2

)

 

(11.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities

$

33.6

 

 

 

 

$

37.9

 

 

 

 

$

(4.3

)

Additions to property, plant and equipment

 

5.9

 

 

 

 

 

7.2

 

 

 

 

 

(1.3

)

Depreciation and amortization

 

9.4

 

 

 

 

 

9.0

 

 

 

 

 

0.4

 

The Company continued to strengthen its balance sheet in the first two quarters of 2006. Cash of $7.3 million was used to fund working capital investments in the first two quarters of 2006 compared to $6.3 million used in the first two quarters of 2005. Inventory levels decreased 1.8% over the same quarter last year and inventory turns increased by 9.0%. Accounts receivable increased 7.8% on a 10.5% increase in revenue over the same quarter last year. The allowance for bad debts and potential product returns was increased as a result of the increase in accounts receivable and revenue. No single customer accounted for more than 10% of the outstanding accounts receivable balance at June 17, 2006.

The increase in accounts payable as compared to the second quarter of 2005 was primarily attributable to the timing of inventory purchases from contract suppliers. The increase in other accrued liabilities compared to the second quarter of 2005 was primarily attributable to adjustments made for foreign currency forward exchange contracts and an increase in employee benefit accruals.

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 amount was outstanding under the revolving credit facilities at June 17, 2006 or at June 18, 2005. Proceeds from the existing credit facility and anticipated renewals, 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 at June 17, 2006 as compared to June 18, 2005 was the result of annual principal payments on the Company's senior notes. The Company had commercial letter-of-credit facilities outstanding of $2.0 million and $3.0 million at June 17, 2006 and June 18, 2005, respectively. The total debt to total capital ratio for the Company was 6.4% at the end of the second quarter of 2006, 8.7% at the end of the second quarter of 2005 and 6.6% for the fiscal year ended December 31, 2005.

The Company's Board of Directors approved common stock repurchase programs on December 13, 2005 and October 5, 2004. Each program authorizes the repurchase of 3.0 million shares of common stock over a 24-month period commencing on the effective date of the program. There were 659,500 shares ($23.32 average price paid per share) repurchased during the second quarter of 2006 and 1,526,200 ($22.40 average price paid per share) repurchased during the first two quarters of 2006 under the programs. There are 1,492,682 shares remaining for future repurchase under the December 13, 2005 program. The primary purpose of the stock repurchase programs is to increase stockholder value. The Company intends to continue to repurchase shares of its common stock in open market or privately negotiated transactions, from time to time, depending upon market conditions and other factors. Additional information about stock repurchases is included in Part II, Item 2 of this Form 10-Q.

The Company declared dividends of $4.2 million in the second quarter of 2006, or $.075 per share. This represents a 15.4% increase over the $.065 per share declared in the second quarter of 2005. The quarterly dividend is payable on August 1, 2006 to stockholders of record on July 3, 2006.


24


Critical Accounting Policies

The preparation of the Company's consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on going basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed 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 the Company's estimates. However, actual results may differ from these estimates under different assumptions or conditions.

The Company has identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in its Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Management believes there have been no changes in those critical accounting policies, except as noted below.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123(R). The Company utilizes the Black-Scholes model, which requires the input of subjective assumptions. These assumptions include estimating (a) the length of time employees will retain their vested stock options before exercising them ("expected term"), (b) the volatility of the Company's common stock price over the expected term and (c) the number of options that will ultimately not complete their vesting requirements ("forfeitures"). Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amounts recognized on the consolidated condensed statements of operations.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

The information concerning quantitative and qualitative disclosures about market risk contained in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2005, is incorporated herein by reference.

The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company's foreign assets, liabilities and inventory purchase commitments and to the extent that its long-term debt requirements are affected by changes in interest rates. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars and by maintaining a significant percentage of fixed-rate debt. The Company does not believe that there has been a material change in the nature of the Company's primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company. As of the date of this Form 10-Q Quarterly Report, the Company does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term.

The methods used by the Company to manage its primary market risk exposures, as described in the sections of its annual report incorporated herein by reference in response to this item, have not changed materially during the current year. As of the date of this Form 10-Q Quarterly Report, the Company does not expect to change its methods used to manage its market risk exposures in the near term. However, the Company may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

The Company's market risk exposure is mainly comprised of its vulnerability to changes in foreign currency exchange rates and interest rates. Prevailing rates and rate relationships in the future will be primarily determined by market factors that are outside of the Company's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" at the beginning of this document for a discussion of the limitations on the Company's responsibility for such statements. For purposes of this item, "near term" means a period of time going forward up to one year from the date of the financial statements.

The Company applies SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138, when accounting for derivative instruments. These provisions require the Company to recognize all derivatives on the consolidated condensed balance sheets at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged


25


assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings.

The Company conducts wholesale operations outside of the United States in Europe and Canada where the functional currencies are primarily the British pound, Canadian dollar and euro. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated with foreign currency inventory purchases made by non-U.S. wholesale operations in the normal course of business. At June 17, 2006 and June 18, 2005, the Company had outstanding forward currency exchange contracts to purchase $61.4 million and $53.6 million, respectively, of various currencies (principally U.S. dollars) with maturities ranging up to 252 days.

On March 23, 2006, the European Commission announced provisional trade measures on certain leather footwear imported into the European Union from China and Vietnam. The measures were implemented in the form of additional duties effective April 7, 2006, and progressing through September 15, 2006, to rates of 19.4% and 16.8% on imports from China and Vietnam, respectively. These trade measures are expected to have an impact resulting in a potential decrease in the Company's earnings per share for fiscal 2006 approximating $.04 to $.05. This impact will be weighted to the back half of the year due to inventory turnover and the progressive duty rate increases under the provisional measures. The European Commission has proposed final measures; however, these have not yet been approved by the member states of the European Union. The Company continues to evaluate actions to limit the impact of any final trade measures which will be evaluated by the Commission over the coming months.

The Company also faces market risk to the extent that its products are produced in countries where certain labor, overhead and raw material costs are paid in foreign currencies, including the Chinese yuan renminbi. As a result, changes in the foreign currency exchange rates of these currencies could cause increases in the price of products which the Company purchases primarily in U.S. dollars.

The Company also has production facilities in the Dominican Republic where financial statements are prepared in U.S. dollars as the functional currency; however, operating costs are paid in the local currency. Royalty revenue generated by the Company from certain third-party foreign licensees is calculated in the licensees' local currencies, but paid in U.S. dollars. Accordingly, the Company's earnings could be impacted as a result of exchange rate changes in 2006 and beyond.

ITEM 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on and as of the time of such evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. There have been no changes during the quarter ended June 17, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.




26


PART II.  OTHER INFORMATION

ITEM 1A.

Risk Factors

The European Union has initiated anti-dumping investigations regarding the importation into the European Union of leather footwear from China and Vietnam and safety footwear from China and India. Provisional anti-dumping measures have been implemented by the European Commission with respect to leather footwear imported into the European Union from China and Vietnam at additional duty rates progressing to 19.4% and 16.8%, respectively, by September of 2006 for certain leather footwear. The proposed final measures are being considered by the European Commission and the final outcome of this proposal is uncertain. The imposition of anti-dumping measures could have a material impact on the Company's business, results of operations and financial condition.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

Issuer Purchases of Equity Securities










Period







Total
Number of
Shares
Purchased








Average
Price Paid
per Share


Total Number
of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs



Maximum
Number
of Shares that
May
Yet Be Purchased
Under the Plans
or
Programs


Period 1 (March 26, 2006 to April 22, 2006)

 

 

 

 

 

 

 

 

Common Stock Repurchase Program(1)

-

$

-

 

-

 

2,152,182

 

Employee Transactions(2)

1,361

 

21.61

 

-

 

-

Period 2 (April 23, 2006 to May 20, 2006)

 

 

 

 

 

 

 

 

Common Stock Repurchase Program(1)

272,800

 

23.43

 

272,800

 

1,879,382

 

Employee Transactions(2)

-

 

-

 

-

 

-

Period 3 (May 21, 2006 to June 17, 2006)

 

 

 

 

 

 

 

 

Common Stock Repurchase Program(1)

386,700

 

23.24

 

386,700

 

1,492,682

 

Employee Transactions(2)

2,141

 

22.78

 

-

 

-

Total for Quarter ended June 17, 2006

 

 

 

 

 

 

 

 

Common Stock Repurchase Program(1)

659,500

$

23.32

 

659,500

 

1,492,682

 

Employee Transactions(2)

3,502

 

22.32

 

-

 

-


 

1.

The Company's Board of Directors approved a common stock repurchase program on December 13, 2005. This program authorizes the repurchase of 3.0 million shares of common stock over a 24-month period commencing on the effective date of the program. All shares repurchased during the period covered by this report were purchased under publicly announced programs.

 

 

 

 

2.

Employee transactions include: (1) shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options and (2) restricted shares withheld to offset tax withholding that occurs upon vesting of restricted shares. The Company's employee stock compensation plans provide that the value of the shares delivered or attested to, or withheld, shall be the average of the high and low price of the Company's common stock on the date the relevant transaction occurs.



27


ITEM 4.

Submission of Matters to a Vote of Security Holders

On April 20, 2006, the Company held its 2006 Annual Meeting of Stockholders. The purposes of the meeting were: to elect three directors for three-year terms expiring in 2009; and to consider and ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the current fiscal year.

Three candidates nominated by the Board of Directors were elected by the stockholders to serve as directors of the Company at the meeting. The following sets forth the results of the voting with respect to each candidate:

 

Name of Candidate

Shares Voted

 

 

 

 

 

 

 

Alberto L. Grimoldi

For

49,047,627

 

 

 

Authority Withheld

3,348,303

 

 

 

Broker Non-Votes

0

 

 

 

 

 

 

 

Brenda J. Lauderback

For

51,847,463

 

 

 

Authority Withheld

548,467

 

 

 

Broker Non-Votes

0

 

 

 

 

 

 

 

Shirley D. Peterson

For

51,821,949

 

 

 

Authority Withheld

573,981

 

 

 

Broker Non-Votes

0

 

 

 

 

 

 

The stockholders also voted to ratify the appointment of Ernst & Young LLP by the Audit Committee of the Board of Directors as the independent registered public accounting firm of the Company for the current fiscal year. The following sets forth the results of the voting with respect to that matter:

 

Shares Voted

 

 

 

 

 

 

For

50,069,755

 

 

Against

2,081,353

 

 

Abstentions

244,820

 

 

Broker Non-Votes

0

 








28


ITEM 6.

Exhibits


 

 

The following documents are filed as exhibits to this report on Form 10-Q:


Exhibit
Number


Document

 

 

3.1

Certificate of Incorporation, as amended. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 26, 2005. Here incorporated by reference.

 

 

3.2

Amended and Restated Bylaws. Previously filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.

 

 

31.1

Certification of Chief Executive Officer and Chairman under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of Executive Vice President, Chief Financial Officer and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32

Certification pursuant to 18 U.S.C. §1350.



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

WOLVERINE WORLD WIDE, INC.
AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

July 27, 2006


 

/s/ Timothy J. O'Donovan


Date

 

Timothy J. O'Donovan
Chief Executive Officer and Chairman
(Duly Authorized Signatory for Registrant)

 

 

 

 

 

 

 

 

 

July 27, 2006


 

/s/ Stephen L. Gulis, Jr.


Date

 

Stephen L. Gulis, Jr.
Executive Vice President, Chief Financial Officer
    and Treasurer
(Principal Financial Officer and Duly Authorized
    Signatory for Registrant)



29


EXHIBIT INDEX

Exhibit
Number


Document

 

 

3.1

Certificate of Incorporation, as amended. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 26, 2005. Here incorporated by reference.

 

 

3.2

Amended and Restated Bylaws. Previously filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 7, 2002. Here incorporated by reference.

 

 

31.1

Certification of Chief Executive Officer and Chairman under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of Executive Vice President, Chief Financial Officer and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32

Certification pursuant to 18 U.S.C. §1350.






30