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 re...