corporate reporting practices for free cash flow executive ... flow... · disclosures of free cash...

DuPree Financial Analysis Lab 800 West Peachtree St. NW (404) 894-9473 Atlanta, GA 30332-0520

http://www.dupree.gatech.edu/finlab

Dr. Charles W. Mulford, CPA, Director Kerianne Maloney Invesco Chair and Professor of Accounting Graduate Research Assistant [email protected] [email protected]

Corporate Reporting Practices for Free Cash Flow

Executive Summary An important measure of financial performance is a firm’s ability to generate sustainable, discretionary cash flow from operations. Many analysts and investors consider free cash flow to be a useful gauge of such performance. Reporting firms are all too happy to report their performance on a free cash flow basis. Disclosures of free cash flow are common and growing. Because free cash flow is not defined by GAAP, definitions differ across firms. Accordingly, there is a lack of comparability across firms that opens an opportunity for confusion in assessments of financial performance. This report surveys the reporting practices and definitions of free cash flow employed by a wide selection of firms. The objective is to catalog the various measures of free cash flow that are being employed and to determine the extent to which these measures differ from what is referred to as a benchmark measure of free cash flow: operating cash flow less net capital expenditures and preferred dividends.

March, 2004

DuPree Financial Analysis Lab www.dupree.gatech.edu/finlab

Corporate Reporting Practices for Free Cash Flow, March 2004 © 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520

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DuPree Financial Analysis Lab DuPree College of Management Georgia Institute of Technology

Atlanta, GA 30332-0520 DuPree Financial Analysis Lab The DuPree Financial Analysis Lab conducts unbiased stock market research. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants. Because our Lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them. Our focus is on issues that we believe will be of interest to a large segment of stock market participants. Depending on the issue, we may focus our attention on individual companies, groups of companies, or on large segments of the market at large. A recurring theme in our work is the identification of reporting practices that give investors a misleading signal, whether positive or negative, of corporate earning power. We define earning power as the ability to generate a sustainable stream of earnings that is backed by cash flow. Accordingly, our research may look into reporting practices that affect either earnings or cash flow, or both. At times our research may look at stock prices generally, though from a fundamental and not technical point of view. Contact Information Charles Mulford. Invesco Chair, Professor of Accounting and the Lab’s Director. Phone: (404) 894-4395 Email: [email protected] Michael L. Ely. MBA, Financial Analyst. Phone: (404) 894-9473 Email: [email protected] Kerianne Maloney. Graduate research assistant and MBA student. Mario Martins. Graduate research assistant and MBA student. Raul Quiroz. Graduate research assistant and MBA student. Website: http://www.dupree.gatech.edu/finlab 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520. ALL RIGHTS RESERVED. The information in this research report was based on sources believed to be reliable and accurate, consisting principally of required filings submitted by the companies represented to the Securities and Exchange Commission. However, no warranty can be made. No data or statement is or should be construed to be a recommendation for the purchase, retention, or sale of the securities mentioned.



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Companies Named in This Report

Airgas Inc........................................................................................................................................ 5 Akamai Technologies, Inc. ........................................................................................................... 18 Alltel Corp .................................................................................................................................... 16 American Standard Companies....................................................................................................... 6 Bausch & Lomb Inc ...................................................................................................................... 12 Casella Waste Systems Inc ........................................................................................................... 13 Charter Communications, Inc. and Subsidiaries........................................................................... 16 DSL Net Inc .................................................................................................................................. 14 Esco Technologies Inc .................................................................................................................... 6 FedEx Corp ................................................................................................................................... 12 Gillette Co....................................................................................................................................... 7 Hollywood Entertainment Corp.................................................................................................... 20 Jostens Inc..................................................................................................................................... 13 Kaydon Corp................................................................................................................................... 7 NCR Corp ....................................................................................................................................... 8 Netflix Inc ....................................................................................................................................... 8 NTN Communications Inc............................................................................................................ 15 Radio Shack Corp ........................................................................................................................... 9 Rayonier Inc.................................................................................................................................... 9 Raytheon Co.................................................................................................................................. 10 Regent Communications Inc......................................................................................................... 17 Rohm & Haas Co. ......................................................................................................................... 10 Sabre Holdings Corp..................................................................................................................... 10 School Specialty Inc ..................................................................................................................... 11 Tyco International Ltd /B.............................................................................................................. 18 Western Wireless Corp ................................................................................................................. 15 Yahoo, Inc..................................................................................................................................... 12



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Corporate Reporting Practices for Free Cash Flow Introduction An important measure of financial performance is a firm’s ability to generate sustainable, discretionary cash flow from operations. Many analysts and investors consider free cash flow to be a useful gauge of such performance. They consider free cash flow to be cash that can be used for such purposes as debt reduction, dividends, stock buybacks, or acquisitions, while maintaining or even growing a company’s productive capacity. Reporting firms are all too happy to report their performance on a free cash flow basis. Disclosures of free cash flow are common and growing. Because free cash flow is not defined by GAAP, definitions differ across firms. Accordingly, there is a lack of comparability across firms that opens an opportunity for confusion in assessments of financial performance. The purpose of this report is to survey firms on their definitions of free cash flow and to measure it on a consistent basis using what we consider to be a benchmark definition: cash provided by operating activities less net capital expenditures and dividends on preferred stock. Because our focus is on free cash flow available for equity holders, our definition excludes new borrowings and debt repayment, which are typically included in definitions of free cash flow for the firm as opposed to the equity owners. We cast our survey net rather wide, looking for firms who made any mention of free cash flow in public disclosures. We found some of the reporting firms to be very careful in their definition and measurement of free cash flow. They provided a detailed calculation of the non-GAAP measure and a reconciliation to some other GAAP-based measure, such as operating cash flow. Other firms were less forthcoming. They provided a definition of free cash flow but did not measure it. The majority of firms surveyed measured free cash flow very close to our benchmark. However, many exceptions were noted, including firms who defined free cash flow using income-based measures, including EBITDA. In cases where we found a firm’s measure of free cash flow to be rather far from our benchmark measure, we recalculated it using the benchmark. We start by providing examples of firms who measured free cash flow using the benchmark or other similar calculations. From there we move to less frequently used measures. Benchmark Measures of Free Cash Flow A large collection of firms measured free cash flow using our benchmark measure. However, variations in the calculation were still noted. For example, some firms subtracted only capital expenditures needed to maintain productive capacity, so-called replacement capital expenditures.



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Our preference for actual capital expenditures, net of dispositions, is to provide for growth in productive capacity. Other firms subtracted dividends on common stock, which we think is unduly restrictive. Free cash flow should be cash that is available for common dividends. At times we saw adjustments made to operating cash flow for nonrecurring or nonoperating items before it was used in computing free cash flow. A case in point is securitizations of accounts receivable, which some firms considered to be financing events. We also saw adjustments to operating cash flow to remove litigation settlements and tax benefits resulting from stock options. We applaud such moves. However, our focus here is not on which adjustments should or should not be made to operating cash flow. Such adjustments have been the focus of other reports from our lab. The following companies are a sample of those we found to employ our benchmark measure of free cash flow, or a close approximation to it.

Airgas, Inc Form 8-K dated 07/24/03 :

Free Cash Flow is a non-GAAP measure of the Company's ability to generate cash from continuing operations, which can be used at management's discretion for acquisitions, the repayment of debt or to support other investing and financing activities. The Company believes that Free Cash Flow provides investors with meaningful insight into the ability of the Company to generate cash flow in excess of the cash required to maintain the Company's existing operations.

Free Cash Flow:

Reconciliation of net cash provided by operating activities per the Consolidated Statement of Cash Flows to Free Cash Flow:

For the quarter ended 06/30/03 06/30/02 (in thousands) Net cash provided by operating activities $15,714 $15,406 Plus: Dividends and fees from equity affiliates 422 684 Less: Cash (provided) used by the securitization of trade receivables 2,300 (6,400) Capital expenditures (21,319) (14,427) Free Cash Flow ($2,883) ($4,737)



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American Standard Companies, Inc. Form 8-K dated 10/15/03:

(in millions)

For the three

months ended

09/30/03

For the three

months ended

09/30/02

For the nine

months ended

09/30/03

For the nine

months ended

09/30/02Net cash provided by operating activities $229.1 $64.1 $473.8 $428.5Other deductions or additions to reconcile to Free Cash Flow: Purchases of property, plant, equipment and computer software (50.7) (46.2) (131.6) (121.4)Proceeds from disposals of property 5.1 1.8 5.5 10.4Free cash flow with proceeds from initial sale of receivables 183.5 19.7 347.7 317.5Proceeds from initial sale of receivables - 100.6 - (81.4)Free cash flow without proceeds from initial sale of receivables $183.5 $120.3 $347.7 $236.1

Esco Technologies, Inc. Form 8-K dated 08/12/03: Per the financial statement footnotes…

The Company defines “Free cash flow” as “Net cash provided by operating activities—continuing operations” less “Capital expenditures—continuing operations”.

For the nine months ended 06/30/03(in thousands) Cash provided by operating activities – continuing operations $28,187Less: capital expenditures – continuing operations (9,568)Free cash flow (1) $18,619

(1) Includes $7.3 million of proceeds from the settlement of patent litigation received during the third quarter of fiscal 2003.



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Gillette Co. Form 10-K for the year ending 12/31/02 (Filing date 03/05/03)

Per the financial statement footnotes…

Financial Condition

Cash provided by operations is the Company's primary source of funds to finance operations, capital investments, stock repurchases and dividends. Free cash flow, defined as cash remaining from operations after capital investments, for 2002 was $1.72 billion, more than doubling over the last two years. A reconciliation of net cash provided by operating activities to free cash flow follows.

For the year ended December 31, 2002 2001 2000(in millions) Net cash provided by operating activities $2,077 $2,092 $1,604Less: Additions to property, plant and equipment (405) (624) (793)Plus: disposals of property, plant and equipment 43 59 41Free cash flow $1,715 $1,527 $ 852

Kaydon Corp. Form 10-K for the period ending 12/31/02 (Filing date 03/19/03) Per the financial statement footnotes…

Free cash flow is cash from operations remaining after the Company has satisfied its capital investment initiatives to enhance manufacturing efficiencies, expand productive capacity and avail itself of other competitive opportunities. As one of its financial strategies, the Company focuses on maximizing free cash flow to achieve management’s primary objective—maximizing long-term shareholder value. The consolidated statements of cash flows are summarized as follows:

For the year ended December 31, 2002 2001 2000(in thousands) Cash flows from (used for): Operations $62,244 $51,236 $65,985Capital expenditures, net (8,821) (9,562) (8,793)Free cash flow $53,423 $41,674 $57,192Cash flows from (used for): Acquisitions, net of borrowings (4,401) 166 (495) Debt repayment (40,160) (6,053) (80)Free cash flow after net capital expenditures, acquisitions, net of borrowings, and debt repayment $8,862 $35,787 $56,617



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NCR Corp. Form 10-K for the period endings 12/31/02 (Filing date 03/13/03) Per the financial statement footnotes…

Our current focus on improving free cash flow, which we define as cash flow from operating activities less capital expenditures for property, plant and equipment, reworkable service parts, and additions to capitalized software, and a continued focus on balance sheet management has increased our ability to generate cash.

For the year ended December 31, 2002 2001 2000(in millions) Net cash provided by operating activities $247 $146 $171Less: Net expenditures and proceeds for service parts (113) (117) (108)Expenditures for property, plant and equipment (81) (141) (216)Additions to capitalized software (65) (67) (67)Free cash flow $(12) $(179) $(220)

Netflix, Inc. Form 8-K dated 10/15/03: Per the financial statement footnotes…

Non-GAAP free cash flow is defined as cash flows from operating activities less cash flows used in investing activities excluding purchases and sales of short-term investments.

For the three months ended Sept.30,

2002June 30,

2003 Sept. 30,

2003(in thousands) Non-GAAP Free Cash Flow reconciliation Net cash provided by operating activities $11,074 $23,620 $21,986Purchases of property and equipment (719) (2,400) (1,596)Acquisitions of DVD library (5,673) (17,027) (13,467)Proceeds from sale of DVDs 568 116 924Deposits and other assets 524 20 11Non-GAAP Free Cash Flow $5,774 $4,329 $7,858



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Radio Shack Corp. Form 10-K For the period ending 12/31/02 (Filing date 03/28/03)

Our free cash flow, defined as cash flow from operating activities less dividends paid and additions to property, plant and equipment, was $375.0 million in 2002, compared to $592.9 million in 2001. We believe free cash flow is an appropriate indication of the corporation's ability to fund share repurchases, repay maturing debt, change dividend payments or fund other uses of capital that management believes will enhance shareholder value.

The following table is a reconciliation of cash provided from operating activities to free cash flow.

For the year ended December 31, 2002 2001 2000(in millions) Net cash provided by operating activities $ 521.6 $ 775.8 $ 116.5Less: Additions to property, plant and equipment (106.8) (139.2) (119.6)Dividends paida (39.8) (43.7) (44.7)Free (negative free) cash flow $ 375.0 $ 592.9 $ (47.8)aThese are dividends on common stock and would not be subtracted under the benchmark measure of free cash flow.

Rayonier, Inc. Form 10-K for the period ending 12/31/02 (Filing date 03/21/03)

Free Cash Flow is defined as cash provided by operating activities of continuing operations less net custodial capital spending, dividends at the prior year level and the tax benefit on the exercise of stock options.

Below is a reconciliation of Cash Provided by Operating Activities to Free Cash Flow for the three-year period ended December 31, 2002 (in millions):

For the year ended December 31, 2002 2001 2000(in millions) Cash provided by operating activities $ 252.9 $ 231.0 $ 286.6Custodial capital spending, neta (65.6) (60.9) (65.9)Dividends at prior year levelb (39.9) (39.2) (35.1)Tax benefit on exercise of stock options (2.5) (1.5) -Free Cash Flow $ 144.9 $ 129.4 $ 185.6aActual capital expenditures were $76.7 in 2002. bThese are dividends on common stock and would not be subtracted under the benchmark measure of free cash flow.



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Raytheon Co. Form 8-K dated 07/24/2003: Per the financial statement footnotes…

Attachment F

Raytheon Company Reconciliation of Non-GAAP Financial Measure Second Quarter 2003

For the three months ended 06/29/03 06/30/02 (in millions) Operating cash flow $640 $293 Less: Capital spending (79) (105) Internal use of software spending (28) (26) Free cash flow $533 $162

Note: Free cash flow represents a non-GAAP financial measure defined as operating cash flow less capital spending and internal use software spending.

Rohm & Haas Co. Form 10-K for the period ending 12/31/02 (Filing date 03/17/03)


We evaluate operating performance based upon several factors including the ability to generate free cash flow. Our definition of free cash flow is cash provided by operating activities less capital asset spending and dividends.

Free cash flows for the years ended December 31, 2002, 2001 and 2000 were as follows:

For the year ended December 31, 2002 2001 2000(in millions) Cash provided by operating activities $975 $704 $780Less: Additions to land, building and equipment (407) (401) (391)Less: dividendsa (181) (176) (171)Free cash flow $387 $127 $218 aThese are dividends on common stock and would not be subtracted under the benchmark measure of free cash flow.



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School Specialty, Inc. Form 8-K dated 08/12/03:

Free cash flow is the amount of cash generated from operating activities after the acquisition of property and equipment, net of proceeds from disposal of property and equipment. Cash flow from operating activities is further adjusted for the activity under the Company’s accounts receivable securitization facility, which the Company considers a financing instrument.

For the three months ended 07/24/03 07/27/02 (in thousands) Free cash flow reconciliation: Net cash used in operating activities $(53,069) $(36,661) Additions to property and equipment (1,659) (3,424) Proceeds from disposal of property and equipment 1,113 96 Net borrowings under accounts receivable securitization facility (4,000) - Free cash flow $(57,615) $(39,989)

Yahoo, Inc. Form 8-K dated 1/14/04:

(in thousands)

For the three

months ended

12/31/03

For the three

months ended

12/31/02

For the year

ended 12/31/03

For the year

ended 12/31/02

Free Cash Flow: Cash flow from operating activities $101,860 $79,358 $428,144 $302,448Acquisition of property and equipment (37,611) (16,672) (117,329) (51,553)Change in long-term deferred revenue - - - (30,000)Overture receivable settled through acquisition 28,071 - 28,071 -Free cash flow $92,320 $62,686 $338,886 $220,895 Investing Activities Used Instead of Capital Expenditures In calculating free cash flow, some firms subtracted from operating cash flow total cash used for investing activities, which may include changes in short-term and long-term investments. To the extent that such investments are not needed for core operations, increases in their balances, a reduction in free cash flow, is equivalent to setting cash aside that can still be used for other discretionary purposes. Reductions in the balances of these investments will artificially increase free cash flow. We think that more meaningful measures of free cash flow are obtained when investments are excluded.



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Bausch & Lomb, Inc. Form 10-K for the period ending 12/28/02 (Filing date 03/21/03)

The company employs free cash flow as a performance metric and has a stated goal to maximize free cash flow, which is defined as cash generated before the payment of dividends, the borrowing or repayment of debt, settlement of minority interest obligations, stock repurchases, the acquisition or divestiture of businesses, the acquisition of intangible assets and the proceeds from the liquidation of certain investments. A reconciliation of cash flow to free cash flow is as follows:

For the year ended December 31, 2002 2001 (in millions) Net change in cash and cash equivalents $(69) $(126) Net cash used in financing activities 230 275 Net cash paid for acquisition of businesses and other intangibles, including the $23 sale price adjustment in 2002 30 49 Proceeds from liquidation of other investments - (97) Free cash flow $191 $101 For the year ended December 31, 2002, using the benchmark measure, free cash flow for Bausch & Lomb becomes (in millions): Operating cash flow $ 236.6 Capital expenditures (91.9) Free cash flow $ 144.7

FedEx Corp. Form 10-Q for the period ending 11/30/02 (Filing date 01/13/03) Per the financial statement footnotes…

“...cash flow from operating activities in excess of cash used in investing activities ("free cash flow")…” LIQUIDITY Cash and cash equivalents totaled $519 million at November 30, 2002, compared to $331 million at May 31, 2002. The following table provides a summary of our cash flows for the six-month periods ended November 30 (in millions):

For the six months ended 11/30/02 11/30/01 (in millions) Net cash provided by operating activities $1,139 $1,064 Net cash used in investing activities (877) (915) Free cash flow $262 $149



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Because no cash was provided or used for other investments during the quarter ended November 30, 2002, the company’s reported free cash flow equaled the benchmark measure. Note that the company did not provide a disclosure of free cash flow in its 10-Q report for the quarter ended November 30, 2003.

Jostens, Inc. Form 8-K dated 08/07/03:

Free cash flow represents cash provided by or used for operating and investing activities. It excludes the effects of cash flow from financing activities. For six months ended June 30,

(in thousands) 2003 2002 Net cash provided by operating activities $32,153 $40,135 Net cash used in investing activities (10,784) (8,959) Free cash flow $21,369 $31,176 For the six months ended June 30, 2003, using the benchmark measure, free cash flow for Jostens, Inc. becomes (in thousands): Operating cash flow $ 32,153 Capital expenditures (5,369) Free cash flow $ 26,784 Free Cash Flow Based on EBITDA Several surveyed companies based their definition of free cash flow on EBITDA, or earnings before interest, taxes, depreciation and amortization. Such a measure of free cash flow will equal the benchmark provided cash interest and taxes were subtracted along with changes in operating working capital, capital expenditures and preferred dividends, if paid. For example, consider Casella Waste Systems, Inc.:

Casella Waste Systems, Inc. Form 8-K dated 09/10/03: For the three months ended 07/31/03 (in thousands) EBITDA $25,137 Add (deduct): Cash interest (2,878) Net closure / post-closure 231 Capital expenditures (17,738) Cash taxes (341) Change in working capital, adjusted for non-cash items (5,953) Free cash flow $(1,542)



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Casella Waste also reconciles free cash flow to operating cash flow: Free cash flow $(1,542) Add/(deduct): Capital expenditures 17,738 Other (1,208) Cash Provided by Operating Activities $14,988

DSL Net, Inc. DSL Net, Inc. defines free cash flow as EBITDA less capital expenditures. The company reconciles its free cash flow measure to its reported net loss. Form 8-dated 5/13/03: For the three months ended 03/31/02 03/31/03 (in thousands) Reconciliation of net loss to adjusted EBITDA & free cash flow Net loss $(9,455) $(9,243) Add back: Interest and other expense (income), net 73 610 Depreciation and amortization 5,114 4,837 Stock compensation 347 278 Adjusted EBITDA (3,921) (3,518) Less capital expenditures (605) (378) Free cash flow $(4,526) $(3,896) For the three months ended March 31, 2003, using the benchmark measure, free cash flow for DSL Net, Inc. becomes (in thousands): Operating cash flow $ (3,949) Capital expenditures (378) Free cash flow $ (4,327)



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NTN Communications Inc NTN employed an unusual definition for free cash flow that was based on EBITDA Form 10-K for the period ending 12/31/02 (Filing date 03/31/03)

Our liquidity and capital resources remain limited and this may constrain our ability to operate and grow our business. In 2002, we generated free cash flow (defined as EBITDA less cash interest expense, cash used in investing activities and cash used in financing activities) of $1,120,000, which has covered our business requirements over that period.

We calculated free cash flow for NTN Communications as follows using the company’s narrative description:

(in thousands)

Year ended December 31, 2002

EBITDA $ 3,282Less: cash interest (312)Less: Cash used in investing activities (1,551)Less: Cash used in financing activities (299)Free cash flow per company definition $ 1,120 For the year ended December 31, 2002, free cash flow for NTN using the benchmark measure becomes (in thousands): Operating cash flow $ 1,131 Capital expenditures (1,284) Free cash flow $ (153)

Western Wireless Corp. Western Wireless defined what they referred to as “unlevered free cash flow” as EBITDA less capital expenditures. In the company’s 10-K for the year ended December 31, 2002 (filed 3/27/03) only a narrative description of free cash flow was provided. We used that narrative to calculate free cash flow.

(in thousands)

Year ended December 31, 2002

EBITDA $308,870Less: Capital expenditures (net) (295,326)Free cash flow per company definition $13,544



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For the year ended December 31, 2002, free cash flow for Western Wireless using the benchmark measure becomes (in thousands): Operating cash flow $ 145,860 Capital expenditures (295,326) Free cash flow $ (149,466) Free Cash Flow Based on Other Measures of Income

Alltel Corp. Alltel Corp. discloses what it refers to as “equity free cash flow from current businesses” (ie., excluding discontinued operations), and bases that measure on net income from current businesses. From Form 8-K dated 07/24/03:

Equity free cash flow from current businesses is a non-GAAP financial measure that is computed as net income from current businesses plus depreciation and amortization less capital expenditures including capitalized software development costs.

For the three

months ended

06/30/03

For the three

months ended

06/30/02

For the six

months ended

06/30/03

For the six

months ended

06/30/02(in thousands) Net income from current businesses $244,016 $222,809 $471,638 $443,835Adjustments to reconcile to equity free cash flow from current businesses: Depreciation and amortization expense 310,712 257,766 614,235 505,263Capital expenditures (303,644) (333,731) (531,395) (524,595)Capitalized software development costs (14,861) (18,564) (28,410) (37,313)Equity free cash flow from current businesses $236,223 $128,280 $526,068 $387,190 For the six months ended June 30, 2003, using the benchmark measure, free cash flow for Alltel Corp. becomes (in thousands): Operating cash flow $ 1,210,091 Capital expenditures (561,395) Capitalized software development costs (28,410) Free cash flow $ 620,286



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The primary difference between the company’s definition of free cash flow and the benchmark is the effect of other non-cash expenses such as the provision for doubtful accounts, deferred income tax expense and the effects of changes in working capital accounts.

Charter Communications, Inc. and Subsidiaries Charter Communications bases its free cash flow on income from operations. Form 8-K dated 07/31/03: For the three months ended 06/30/03 06/30/02 (in millions) Income from operations $112 $85 Depreciation and amortization 377 361 Option compensation expense, net -- 1 Special charge, net 8 -- Less: Interest on cash pay obligations (281) (276) Less: Purchases of property, plant and equipment (160) (603) Free cash flows $56 $(432) The company reconciles its free cash flow measure to operating cash flow: Free cash flows $56 $(432) Purchase of property, plant and equipment 160 603 Special charges, net (8) -- Other, net (2) (2) Change in operating assets and liabilities (83) (34) Net cash flow from operating activities $123 $135 For the three months ended June 30, 2003, using the benchmark measure, free cash flow for Charter Communications becomes (in millions): Operating cash flow $ 123 Capital expenditures (160) Free cash flow $ (37)

Regent Communications, Inc. Form 8-K dated 08/08/03:

Regent also reported free cash flow (defined as net income plus depreciation, amortization and other non-cash expenses, less maintenance capital expenditures and other non-cash income) for the second quarter of 2003 of $4.4 million compared to free cash flow of $3.2 million for the second quarter of 2002.



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For the three months ended 06/30/03 06/30/02 (in thousands) Net income $1,924 $1,674 ADD: Depreciation and amortization 1,095 847 Non-cash interest expense 1,079 70 Non-cash taxes 1,120 920 Other non-cash items (compensation, barter) (161) 49 LESS: capital expenditures (671) (392) Free cash flow $4,386 $3,168 For the three months ended June 30, 2003, using the benchmark measure, free cash flow for Regent Communications becomes (in thousands): Operating cash flow $ 704 Capital expenditures (671) Free cash flow $ 33

Other Atypical Definitions of Free Cash Flow

Akamai Technologies, Inc. Form 8-K dated 10/29/03: Akamai Technologies, Inc. defines free cash flow as, “the net change in cash and cash equivalents and marketable securities quarter-over-quarter.” For the three months ended 09/30/03(in thousands) Change in cash and cash equivalents per the consolidated statement of cash flow $(6,823)Change in marketable securities 9,443Free cash flow $2,620 For the three months ended September 30, 2003, using the benchmark measure, free cash flow for Akamai becomes (in thousands): Operating cash flow $ 610 Capital expenditures (2,082) Free cash flow $(1,472)



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Recent Changes in Free Cash Flow Definitions Some survey companies recently changed their definitions of free cash flow, moving it toward the benchmark measure. Examples include Tyco International, Ltd. and Hollywood Entertainment Corp.

Tyco International, Ltd. Form 8-K dated 07/29/03: Tyco provided the following display of its old and new definitions of free cash flow. The new definition is more conservative than the old and factors in cash paid for acquired dealer accounts, which is similar to capitalized customer acquisition costs (a form of capital expenditure) and cash paid in purchase acquisitions.

(in millions)

For the quarters

ended 06/30/03

For the quarters

ended 06/30/02

For the nine

months ended

06/30/03

For the nine

months ended

06/30/02Net cash provided by operating activities, continuing operations $1,463.2 $1,056.6 $3,569.8 $3,592.8Sale of accounts receivable programs (40.6) 85.6 55.9 113.6Capital expenditures, net (282.1) (408.5) (848.2) (1,387.6)Purchase of previously leased TyCom ship (55.9) - (55.9) -Tyco Global Network spending (29.4) (165.2) (118.4) (982.6)Dividends paida (25.2) (25.3) (75.6) (75.0)‘Free cash flow’ – old definition $1,030.0 $543.2 $2,527.6 $1,261.2 Acquisition of dealer accounts (147.9) (325.5) (506.2) (871.7)Cash paid for purchase accounting and holdback/earn-out liabilities (37.8) (144.4) (227.3) (520.8)‘Free cash flow’ – new definition $844.3 $73.3 $1,794.1 $(131.3)aThese are dividends on common stock and would not be subtracted under the benchmark measure of free cash flow.



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Hollywood Entertainment Corp Hollywood Entertainment changed its definition of free cash flow from a measure based on EBITDA to the benchmark measure. Form 8-K dated 01/29/04: Per the financial statement footnotes…

Full year 2003 EBITDA was $244 million and free cash flow was $73 million. Free cash flow is calculated on the Consolidated Statement of Cash Flows as Cash Flow Provided By Operating Activities of $391 million, less Net Purchases of Rental Inventory of $220 million, less Net Purchases of Property and Equipment of $94 million, less the Increase in Intangibles and Other Assets.

. The following is a calculation of free cash flow for 2003 (in thousands):

For the twelve months ended 12/31/03(in thousands) Cash provided by operating activities $391,248Purchases of rental inventory, net (220,364)Purchases of property and equipment, net (94,123)Increase in intangibles and other assets (3,273)Free cash flow $73,488

The company’s definition of free cash flow calculated in the previous year follows:.

Form 10-K for the period ending 12/31/02 (Filing date 03/27/03)


Discretionary Free Cash Flow represents EBITDA, less cash paid for interest and taxes, less maintenance capital expenditures, but before discretionary investments in expenditures that are not required to maintain existing stores (e.g. investment in new store openings and new product platform rollouts). We believe Discretionary Free Cash Flow is a useful measurement in determining our ability to meet our growth plans, satisfy working capital demands and meet our debt service requirements. Following is a table calculating Discretionary Free Cash Flow (in thousands):

For the twelve months ended 12/31/02 12/31/02 (in thousands) EBITDA $233,779 $204,554 Less: Cash interest paid (41,415) (54,651) Cash taxes paid (2,613) (768) Maintenance capital expenditures (9,622) (6,441) Discretionary Free Cash Flow $180,129 $142,694



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Conclusion We surveyed corporate measures of free cash flow for a broad cross section of firms. Most companies surveyed defined free cash flow in a manner that was generally consistent with our benchmark measure – operating cash flow less net capital expenditures and dividends on preferred stock. However, there were many other measures used, including some based on income and EBITDA. Importantly, we did note some movement toward the benchmark measure in the definitions of free cash flow employed Recently, the Securities and Exchange Commission enacted Regulation G, which requires firms who report non-GAAP measures such as free cash flow, to reconcile them to the closest GAAP-defined amount. We found compliance with this Regulation by firms who provided a specific measure of free cash flow. Usually, free cash flow was reconciled to operating cash flow. Occasionally it was reconciled to net income. However, regardless of the direction the reconciliations took, we found them to be quite valuable in determining our own measure of free cash flow.

corporate reporting practices for free cash flow executive ... flow... · disclosures of free cash...

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