Mietteitä Sijoittamisesta

Piensijoittajan avoin muistio

Stanley Furniture ja Johdon Palkitseminen

with one comment

Kirjoitin eilisen linkkilistan yhteydessä, että STLY oli valinnut johdon palkitsemismittariksi tuloksen ennen veroja ja korkoja (EBIT). En ollut kovin vakuuttunut siitä, että yritys päätti käyttää vain yhtä mittaria kompensaation määritelyssä, joten lähetin Micah Goldsteinille (CFO/hallituksen jäsen) sähköpostitse kysymyksen asiasta. Yllätyin positiivisesti hänen vastauksensa nopeudesta, ottaen huomioon, että kyseessä oli lauantai. Keskustelu sivusi myös sisäpiirin ostoja sekä tulevaisuuden veroetuja. Goldsteinin luvalla julkaisen pätkiä keskustelustamme.

Minä:

Is EBIT really the only metric that is used to measure the performance of the key employees? If this is correct then would it be possible to get further explanation on why this single metric was chosen? In my opinion, it doesn’t tell enough about the company’s performance. What about cash generated from operations/free cash flow, top-line growth, debt/asset-ratio, book value growth or return on equity? All of those are important in determining the financial performance and health of the company.

Goldstein:

As you are well aware, there are many metrics to chose from that indicate the health of a business.  We fundamentally believe that earnings and in particular, operating income, should be the primary focus of our management team.  Since repaying all our debt at the end of 2010 and the fact that our remaining interest expense is really non-cash, operating income is a great proxy and a way to keep management focused on creating value for the shareholder.

We have been transparent in our communication about what level of revenue would be required for us to reach we break-even at the operating level so by default, our current metric does incorporate other measures. In other words, the EBIT levels required for us to reach target or max bonus are only possible with revenue growth.

We are heavily investing in our business and these investments must create earnings for our shareholders.  Both Glenn and I continue to purchase open market shares and increase our individual ownership.  We fundamentally believe in aligning our incentives with what is best for our shareholders and have put a lot of thought into both the metrics and the plan that will support us achieving those levels.

As a side, we did review our 2012 comp plan with an executive compensation consultant who said “best practice” was to limit metrics to no more than two.  As we return to profitability we will stay open-minded and make sure we are using metric(s) that align the incentives of all stakeholders.

Minä:

My main concern with earnings (as the compensation metric) is that they are very much accounting numbers, whereas cash flow is tangible and not possible to alter with accounting methods (at least in the same magnitude as earnings). So if, for example, net cash from operating activities would be used as another metric, then I think that it would reassure fellow investors that the management is focused on the the most important thing: cash generation. It’s of course true that insider ownership and open-market purchases are also an encouraging sign and that your communication has been good and transparent.

Goldstein:

I understand your concern and your interest in us being rewarded for generating cash from operations.  Many companies have been criticized for rewarding management for generating cash at the expense of earnings – for instance, companies who promote and discount products to deplete inventories.  Selling product at a loss could generate cash but detract from earnings.

We believe that operating income, which does not include any proceeds from CDSOA is the purest measure for our team.  Operating income plus depreciation is a good proxy for cash generated or lost from operations.  I hope I do not appear defensive but believe that we are really interested in the same outcome and that our attaining bonus next year would be mutually beneficial.

Minä

You make a good point about discounting products and inventory depletion, but just to make sure that I’ve elaborated myself clearly: I think that the *combination* of earnings and cash flow (plus maybe some other metric) would be a better measurement than just the earnings alone. This would make sure that the earnings would be tangible instead of just numbers on the paper (i.e. skewed by accounting). I have no reasons to believe that Stanley’s management team would do such things, so I’m really just speaking generally about the topic and not because I want to criticize your team. And actually, now that you’ve explained your point, EBIT seems like a pretty decent measurement.

Regarding EBIT: I know that Stanley is virtually debt free, but what about taxes, does Stanley have loss-carryforwards and if so, for how long?

Goldstein:

I understand your point and appreciate the feedback. We are pretty rigid in our accounting policies and oversight and as a shareholder, will assure you that this practice will continue.
As far as taxes are concerned, we have a large loss carry-forward to consume before we will pay taxes again.  In terms of how long, it depends on our ability to return the company to profitability as well as timing and amounts of future CDSOA distributions.  Last quarters Q has the exact dollars of our loss carry forward and I think I mentioned on the last call the amount of earnings we could protect from taxes.

Written by vdell

11/12/2011 at 10:03

One Response

Subscribe to comments with RSS.

  1. Ihan hyviä pointteja ja mielenkiintoinen firma. EBIT:in käyttö kannustimissa on mielestäni aika kohtuullista verrattuna keskivertofirmoihin. Minä olisin huolestunut EBIT:in käytöstä siitä syystä että se ei huomioi omanpääoman kustannusta (tai no oikeastaan poistojen kautta tulee viiveellä). Eli firma voisi tehdä ylihintaisen yritysoston ja ostetun firman tulos kasvattaa EBIT:iä vaikka omistaja-arvoa olisikin tuhottu.

    Raimo Laitinen

    21/06/2012 at 19:03


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: