Stock option helps cash flow for Crocs?

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I was reading the cash flow statement of CROX Q3 2007 10-Q. One thing caught my attention is the “Excess tax benefit on share-based compensation”, about $38.6 m for first 9 months of 2007, plus the “Exercise of stock options” $ 14 m., the total “Cash provided by financing activities” is $ 52 m, compared to the cash from operating activities for about $ 22 m.

This is a bit strange because normally we want the cash comes from operating activities, i.e., a company’s main business. For instance, in the case of Crocs, its main business is manufacturing and sale of Crocs sandles. It’s not a financial service company: a bank, or a lender of student loans something.

I did a little research on this topic. I found a paper written by Marc Siegel which describes what companies do these days to artificially boost cash flow statement (legally), and a newspaper article from Rocky Mountain News explains this a bit in plain English.

So what’s my opinion? I agree with both authors’ point to large extent. I think this finance strategy only works when the stock price go up. On the surface it benefits the company’s cash flow because the company pays less tax. It benefits the executives more because not employee but executives received most of the stock options. The IRS appears to be the loser, but the bigger loser is of course the loyal shareholders who bought the stock high and lost all the money when the stock went down.

Interestingly, I found Deckers (DECK), another fashion shoes maker, also had similar item on its cash flow statement.

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