As apparel maker Cutter & Buck (NASDAQ:CBUK) lines up to report earnings tomorrow morning, investors are nervous. They needn't be.

Granted, it's likely to be a disappointing quarter all around. Analysts don't believe the company will eke out more than $0.19 per share in profits in fiscal Q2 2006. If true, that would make for a hefty 27% decline in profits versus the year-ago quarter, despite an expected drop in revenues of only 4%.

Likewise, we're expecting to see inventories rise against year-ago levels. The company warned investors about this three months ago, and hasn't contradicted that report since. It's also possible that tying up that additional money in golfwear could make Cutter's cash flow suffer along with GAAP profitability.

But despite all this anticipated bad news, there are two points that I think Fools need to bear in mind. First, look at the cash flow situation once more.

Last quarter, Cutter generated twice as much free cash flow as it reported in GAAP net income. If the company manages to repeat that feat despite growing its inventories this quarter, investors should sit up and take notice, since Cutter has been generating less than half as much cash as GAAP profits over the past year. A reversal of that trend is worth hoping for; if the company succeeds, expect it to earn rewards from Wall Street. (On the other hand, a failure to bring "cash profits" back into line with "accounting profits" may be punished less harshly, because the market will be expecting inventories to soak up cash flow in any case.)

Second, and more importantly, Cutter has been making some moves that demonstrate both a commitment to responsible corporate governance and a willingness to entertain buyout offers. Last quarter, Cutter announced three new corporate governance initiatives, the most important of which are:

  • Phasing out its "shareholder rights" plan. More commonly known to investors as a "poison pill," such plans aim to give hostile acquirers indigestion when they try to buy too large a stake in a target company, issuing additional shares to dilute the acquirer's stake.

  • Eliminating the staggered three-year "class" system on its board. By making all directors stand for election annually, the firm has made it easier for a would-be acquirer to gain control over the company soon after buying a controlling block of shares.

Both moves look to this Fool like unabashed pro-shareholder actions. In the long term, when management takes such steps in its owners' interests, sooner or later those owners will be rewarded.

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Fool contributor Rich Smith does not own shares in Cutter & Buck.