Stuart Olson Inc CUUHF

Issue: Stock price decline will HELP reported 3Q earnings

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Stuart Olson accountants mark-to-market the employee stock options and "share-based payment reserve" at the end of each quarter.  They will reverse compensation expense accruals made in previous quarters.

Stock price on Fri June 29 closed at $7.70, then on Fri Sept 28 closed at $5.70, for a decline of exactly $2.00 per share.

I calculated that stock options (outstanding) mark-to-market will generate $2,875,000 of pre-tax income in 3Q/2018.  The RSUs (Restricted Share Units), PSUs (Performance Share Units) and DSUs (Deferred Share Units), as a group, will generate $4,783,000 of pretax income.  I have assumed 100% attainment on the PSUs.  This can range from 0% to 200% when the actual performance reviews occur, which is in the future.  100% is close enough for this exercise.

Applying SOX's 30% tax rate and 27.5m shares, this equates to $0.19 in EPS.  Except their accounting policy is to charge the stock option mark-to-market change directly to retained earnings.  So only $0.12 per share will show up in EPS in 3Q/2018.  But 2Q/2018 EPS was only $0.04 per share.

Conclusion is 3Q EPS will be a lot higher than 2Q.  Unless the company decides to offset this earnings boost with a big write-off.  Bur they already wrote off $1.4m in restructuring expense in 2Q/2018 which was itself $0.03 per share.  So I don't expect another write-off so soon.