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
Invesco Chair and Professor of Accounting
charles.mulford@mgt.gatech.edu
Kerianne Maloney
Graduate Research Assistant
gtg335k@mail.gatech.edu
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
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2
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: charles.mulford@mgt.gatech.edu
Michael L. Ely. MBA, Financial Analyst.
Phone: (404) 894-9473
Email: michael.ely@mgt.gatech.edu
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.
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
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3
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
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
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4
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.
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
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5
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
(in thousands)
Net cash provided by operating activities
Plus:
Dividends and fees from equity affiliates
Less:
Cash (provided) used by the securitization of trade
receivables
Capital expenditures
Free Cash Flow
06/30/03
06/30/02
$15,714
$15,406
422
684
2,300
(21,319)
($2,883)
(6,400)
(14,427)
($4,737)
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
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6
American Standard Companies, Inc.
Form 8-K dated 10/15/03:
(in millions)
Net cash provided by operating activities
Other deductions or additions to reconcile to
Free Cash Flow:
Purchases of property, plant, equipment and
computer software
Proceeds from disposals of property
Free cash flow with proceeds from initial sale
of receivables
Proceeds from initial sale of receivables
Free cash flow without proceeds from initial
sale of receivables
For the
three
months
ended
09/30/03
$229.1
For the
For the
For the
three
nine
nine
months
months
months
ended
ended
ended
09/30/02 09/30/03 09/30/02
$64.1
$473.8
$428.5
(50.7)
5.1
(46.2)
1.8
(131.6)
5.5
(121.4)
10.4
183.5
-
19.7
100.6
347.7
-
317.5
(81.4)
$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
(in thousands)
Cash provided by operating activities – continuing
operations
Less: capital expenditures – continuing operations
Free cash flow (1)
06/30/03
$28,187
(9,568)
$18,619
(1) Includes $7.3 million of proceeds from the settlement of patent litigation received during the
third quarter of fiscal 2003.
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
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7
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,
(in millions)
Net cash provided by operating activities
Less: Additions to property, plant and equipment
Plus: disposals of property, plant and equipment
Free cash flow
2002
2001
2000
$2,077
(405)
43
$1,715
$2,092
(624)
59
$1,527
$1,604
(793)
41
$ 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,
(in thousands)
Cash flows from (used for):
Operations
Capital expenditures, net
Free cash flow
Cash flows from (used for):
Acquisitions, net of borrowings
Debt repayment
Free cash flow after net capital expenditures,
acquisitions, net of borrowings, and debt
repayment
2002
2001
2000
$62,244
(8,821)
$53,423
$51,236
(9,562)
$41,674
$65,985
(8,793)
$57,192
(4,401)
(40,160)
166
(6,053)
(495)
(80)
$8,862
$35,787
$56,617
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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8
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,
(in millions)
Net cash provided by operating activities
Less:
Net expenditures and proceeds for service parts
Expenditures for property, plant and equipment
Additions to capitalized software
Free cash flow
2002
2001
2000
$247
$146
$171
(113)
(81)
(65)
$(12)
(117)
(141)
(67)
$(179)
(108)
(216)
(67)
$(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
(in thousands)
Non-GAAP Free Cash Flow reconciliation
Net cash provided by operating activities
Purchases of property and equipment
Acquisitions of DVD library
Proceeds from sale of DVDs
Deposits and other assets
Non-GAAP Free Cash Flow
Sept.30,
2002
June 30,
2003
Sept. 30,
2003
$11,074
(719)
(5,673)
568
524
$5,774
$23,620
(2,400)
(17,027)
116
20
$4,329
$21,986
(1,596)
(13,467)
924
11
$7,858
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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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
$ 116.5
Less:
Additions to property, plant and equipment
(106.8)
(139.2)
(119.6)
a
Dividends paid
(39.8)
(43.7)
(44.7)
Free (negative free) cash flow
$ 375.0
$ 592.9
$ (47.8)
a
These 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
$ 286.6
Custodial capital spending, neta
(65.6)
(60.9)
(65.9)
b
Dividends at prior year level
(39.9)
(39.2)
(35.1)
Tax benefit on exercise of stock options
(2.5)
(1.5)
Free Cash Flow
$ 144.9
$ 129.4
$ 185.6
a
Actual capital expenditures were $76.7 in 2002.
b
These are dividends on common stock and would not be subtracted under the benchmark
measure of free cash flow.
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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10
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
(in millions)
Operating cash flow
Less: Capital spending
Internal use of software spending
Free cash flow
06/29/03
06/30/02
$640
(79)
(28)
$533
$293
(105)
(26)
$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)
Per the financial statement footnotes…
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:
2001
2000
For the year ended December 31,
2002
(in millions)
Cash provided by operating activities
$975
$704
$780
Less: Additions to land, building and equipment
(407)
(401)
(391)
a
Less: dividends
(181)
(176)
(171)
Free cash flow
$387
$127
$218
a
These are dividends on common stock and would not be subtracted under the benchmark
measure of free cash flow.
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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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
(in thousands)
Free cash flow reconciliation:
Net cash used in operating activities
Additions to property and equipment
Proceeds from disposal of property and equipment
Net borrowings under accounts receivable
securitization facility
Free cash flow
07/24/03
07/27/02
$(53,069)
(1,659)
1,113
$(36,661)
(3,424)
96
(4,000)
$(57,615)
$(39,989)
Yahoo, Inc.
Form 8-K dated 1/14/04:
(in thousands)
Free Cash Flow:
Cash flow from operating activities
Acquisition of property and equipment
Change in long-term deferred revenue
Overture receivable settled through acquisition
Free cash flow
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
$101,860
(37,611)
28,071
$92,320
$79,358 $428,144
(16,672) (117,329)
28,071
$62,686 $338,886
$302,448
(51,553)
(30,000)
$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.
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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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,
(in millions)
Net change in cash and cash equivalents
Net cash used in financing activities
Net cash paid for acquisition of businesses and other
intangibles, including the $23 sale price adjustment in
2002
Proceeds from liquidation of other investments
Free cash flow
2002
2001
$(69)
230
$(126)
275
30
$191
49
(97)
$101
For the year ended December 31, 2002, using the benchmark measure, free cash flow for Bausch
& Lomb becomes (in millions):
Operating cash flow
Capital expenditures
Free cash flow
$ 236.6
(91.9)
$ 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
(in millions)
Net cash provided by operating activities
Net cash used in investing activities
Free cash flow
11/30/02
11/30/01
$1,139
(877)
$262
$1,064
(915)
$149
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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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)
Net cash provided by operating activities
Net cash used in investing activities
Free cash flow
2003
$32,153
(10,784)
$21,369
2002
$40,135
(8,959)
$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
Capital expenditures
Free cash flow
$ 32,153
(5,369)
$ 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
(in thousands)
EBITDA
Add (deduct):
Cash interest
Net closure / post-closure
Capital expenditures
Cash taxes
Change in working capital, adjusted for non-cash
items
Free cash flow
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
07/31/03
$25,137
(2,878)
231
(17,738)
(341)
(5,953)
$(1,542)
DuPree Financial Analysis Lab
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Casella Waste also reconciles free cash flow to operating cash flow:
Free cash flow
Add/(deduct):
Capital expenditures
Other
Cash Provided by Operating Activities
$(1,542)
17,738
(1,208)
$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
(in thousands)
Reconciliation of net loss to adjusted EBITDA & free
cash flow
Net loss
Add back:
Interest and other expense (income), net
Depreciation and amortization
Stock compensation
Adjusted EBITDA
Less capital expenditures
Free cash flow
03/31/02
03/31/03
$(9,455)
$(9,243)
73
5,114
347
(3,921)
(605)
$(4,526)
610
4,837
278
(3,518)
(378)
$(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
Capital expenditures
Free cash flow
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
$ (3,949)
(378)
$ (4,327)
14
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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)
EBITDA
Less: cash interest
Less: Cash used in investing activities
Less: Cash used in financing activities
Free cash flow per company definition
Year ended
December
31, 2002
$ 3,282
(312)
(1,551)
(299)
$ 1,120
For the year ended December 31, 2002, free cash flow for NTN using the benchmark measure
becomes (in thousands):
Operating cash flow
Capital expenditures
Free cash flow
$ 1,131
(1,284)
$ (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)
EBITDA
Less: Capital expenditures (net)
Free cash flow per company definition
Year ended
December
31, 2002
$308,870
(295,326)
$13,544
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
15
DuPree Financial Analysis Lab
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16
For the year ended December 31, 2002, free cash flow for Western Wireless using the
benchmark measure becomes (in thousands):
Operating cash flow
Capital expenditures
Free cash flow
$ 145,860
(295,326)
$ (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.
(in thousands)
Net income from current businesses
Adjustments to reconcile to equity free cash
flow from current businesses:
Depreciation and amortization expense
Capital expenditures
Capitalized software development costs
Equity free cash flow from current
businesses
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
$244,016
$222,809
$471,638
$443,835
310,712
(303,644)
(14,861)
257,766
614,235
505,263
(333,731) (531,395) (524,595)
(18,564) (28,410) (37,313)
$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
Capital expenditures
Capitalized software development costs
Free cash flow
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
$ 1,210,091
(561,395)
(28,410)
$ 620,286
DuPree Financial Analysis Lab
www.dupree.gatech.edu/finlab
17
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
(in millions)
Income from operations
Depreciation and amortization
Option compensation expense, net
Special charge, net
Less: Interest on cash pay obligations
Less: Purchases of property, plant and equipment
Free cash flows
06/30/03
06/30/02
$112
377
-8
(281)
(160)
$56
$85
361
1
-(276)
(603)
$(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
Capital expenditures
Free cash flow
$ 123
(160)
$ (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.
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
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For the three months ended
(in thousands)
Net income
ADD:
Depreciation and amortization
Non-cash interest expense
Non-cash taxes
Other non-cash items (compensation, barter)
LESS: capital expenditures
Free cash flow
18
06/30/03
06/30/02
$1,924
$1,674
1,095
1,079
1,120
(161)
(671)
$4,386
847
70
920
49
(392)
$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
Capital expenditures
Free cash flow
$ 704
(671)
$ 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
(in thousands)
Change in cash and cash equivalents per the
consolidated statement of cash flow
Change in marketable securities
Free cash flow
09/30/03
$(6,823)
9,443
$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
Capital expenditures
Free cash flow
$ 610
(2,082)
$(1,472)
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
www.dupree.gatech.edu/finlab
19
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)
Net cash provided by operating activities,
continuing operations
Sale of accounts receivable programs
Capital expenditures, net
Purchase of previously leased TyCom ship
Tyco Global Network spending
Dividends paida
‘Free cash flow’ – old definition
For the
quarters
ended
06/30/03
For the
quarters
ended
06/30/02
For the
nine
months
ended
06/30/03
$1,463.2
(40.6)
(282.1)
(55.9)
(29.4)
(25.2)
$1,030.0
$1,056.6
85.6
(408.5)
(165.2)
(25.3)
$543.2
$3,569.8
55.9
(848.2)
(55.9)
(118.4)
(75.6)
$2,527.6
For the
nine
months
ended
06/30/02
$3,592.8
113.6
(1,387.6)
(982.6)
(75.0)
$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)
a
These are dividends on common stock and would not be subtracted under the benchmark
measure of free cash flow.
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
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20
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
(in thousands)
Cash provided by operating activities
Purchases of rental inventory, net
Purchases of property and equipment, net
Increase in intangibles and other assets
Free cash flow
12/31/03
$391,248
(220,364)
(94,123)
(3,273)
$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)
Per the financial statement footnotes…
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
(in thousands)
EBITDA
Less: Cash interest paid
Cash taxes paid
Maintenance capital expenditures
Discretionary Free Cash Flow
12/31/02
12/31/02
$233,779
(41,415)
(2,613)
(9,622)
$180,129
$204,554
(54,651)
(768)
(6,441)
$142,694
Corporate Reporting Practices for Free Cash Flow, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520
DuPree Financial Analysis Lab
www.dupree.gatech.edu/finlab
21
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 GAAPdefined 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, March 2004
© 2004 by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA 30332-0520