The existing metric used to calculate the bonuses for the Compass senior executive incentive plan is earnings before interest, taxes, depreciation and amortization, or EBITDA; the suggested alterative metric is Economic Value Added, or EVA. Per the request of CFO, Rodney L. Underdown, the following is an assessment on both metrics and a recommendation to use EVA as the target indicator that best represents the future growth of Compass.
In recent years, 2011-2013, weather conditions have affected both segments resulting in lower production rates and sales. As a result, assumptions were made to prepare the 2014-2016 forecasts that focused around averages of the years prior to the weather impact. Detailed assumptions are included in the Analysis section of this report. An assessment was done on the salt and specialty fertilizer segments independently and resulted in overall sales growth of 16% for 2014, and 11% in both 2015 & 2016. This represents continued growth in the salt segment and a higher growth rate in the fertilizer segment.
Although both EBITDA and EVA show significant growth in the forecast, the EBITDA does not account for 46-47% of profit loss due to capital and other expenses. This is an unrealistic measure of the company’s profitability and does not adequately measure the actual cash flow of the company. The EVA metric includes both the profit after taxes and the cost of capital deductions involved in the revenues coming into the company. Therefore, EVA would be a more accurate reflection of Compass’ overall year-over-year growth and it is recommended that EVA replace EBITDA in the formula to calculate bonuses for the senior executive incentive plan.
As shown in the sensitivity analysis in Appendix D, the key drivers include the inputs to the WACC calculation as well as tax and the range of assumptions. The calculated EVA for 2013 is 62.3 and for 2014-2016 are 118.4, 131.3, and 143.9, respectively. I recommend the 2014 target be set at 118.4 for the incentive plan.
OVERVIEW
Compass Minerals International Inc. is a producer of salt and specialty fertilizers worldwide. The Chief Financial Officer of Compass, Rodney L. Underdown, has requested that an assessment be completed on the metric used to calculate the senior executive annual incentive plan. The existing metric used for incentive plan calculations is earnings before interest, taxes, depreciation and amortization, or EBITDA; the suggested alterative metric is economic value added, or EVA. Within this assessment, a forecasted income statement and balance sheet is required for the years 2014, 2015 and 2016. The analysis is to include an EBITDA / EVA comparison for the years 2013 through 2016, including all assumptions, drivers and target plan recommendations for each year.
STATEMENT OF PROBLEM(S)
The Compass company is comprised of two segments – salt and specialty fertilizers. Weather conditions have an effect on both segments and, in recent years, both salt and specialty fertilizer production and sales was impacted by unforeseen weather patterns. The salt segment was affected by low snowfall during the winters of 2011-2012 and 2012-2013 resulting in lower sales during those years. In addition, a tornado damaged the primary salt producing mine in August 2011, reducing production significantly and resulting in sales losses in 2012 and 2013. The specialty fertilizer segment was impacted by an unusually wet season in 2011, which slowed the solar evaporation process and reduced production in subsequent years of 2012 and 2013. Thus, both segments suffered sales losses in at least two of the past three years. The primary analysis requested is for a comparison of EVA to the existing plan formula using EBITDA. This is difficult, however, because the prior year calculations of the incentive plan are unknown with the information provided. Although EBITDA is provided for comparison, neither the target
