The Calculation of Free of Free Cash Flow •
Three methods to calculate FCF:
1. Use the sources of cash of cash flow equation:
C - I = OI - Δ NOA that is, free cash flow is operating income adjusted for the change in net operating assets 2. Use the disposition of cash of cash flows equation:
C - I = NFE - Δ NFO + d that is, free cash flow is net financial expenses, adjusted for the change in net financial obligations, plus dividends to common shareholders. 3. FCF can also be obtained from the reformulated Statement of Cash of Cash Flows.
Calculation of Free of Free Cash Flow: Nike, Inc.: 2004 Method 1:
C – I = OI - ΔΝΟΑ
Operating income 2004 Net operating operating assets 2004 Net operating operating assets 2003 Free cash flow
2004
Method 2:
Free cash flow
(221) $814
C – I = NFE - ΔΝFO + d
Net financial expenses expenses 2004 Net financial obligations obligations 2004 Net financial obligations obligations 2003 Net dividend dividend
$ 1,035 $ 4,551 4,330
$ 16 (289) 302
591
2004
207
2004
$814
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Calculation of Free Cash Flow: Reebok, 2004 Method 1:
Method 2:
C – I = OI - ΔΝΟΑ Operating income Net operating assets Net operating assets
2004 2004 2003
Free cash flow
2004
$ 237 $1,212 731
481 $ (244)
C – I = NFE – Δ NFO + d +MI(income) -ΔMI(balance sheet) Net financial expenses 2004 Net financial obligations 2004 Net financial obligations 2003
$ 18 (23) (316)
Net dividend 2004 Minority interest in income Change in minority interest in balance sheet
Free cash flow,
2004
(293) 23 5 3 ___________ $ (244)
The Standard GAAP Statement of Cash Flows Standard Statement of Cash Flows “Cash Flow from Operations” - “Cash Used in Investing Activities” + “Cash from Financing Activities” = Δ in Cash and Cash Equivalents
Reformulated Statement of Cash Flows Cash flow from Operations - Cash investments =Free Cash Flow from Operating Activities Cash Paid to Shareholders + Cash Paid to Debtholders and Issuers =Cash Paid for Financing Activities
This format follows the cash conservation equation: C – I = d +F
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Indirect Method for Cash Flow from Operations Net income + Accruals = Cash from operations ’ (as do almost all firms): 2004 Net income $ 945.6 millions Accruals 568.8 $1,514.4 millions
Cash provided by operations
Nike, Inc. GAAP Statement of Cash Flows
2004 Cash provided (used) by operations: Net income Income charges not affecting cash: Cumulative effect of accounting change Depreciation Deferred income taxes Amortization and other Income tax benefit from exercise of stock options Changes in certain working capital com onents: : Decrease (increase) in accounts receivable (Increase) decrease in inventories (Increase) decrease in prepaids and other current assets Increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash provided (used) by investing activities: Purchases of short-term investments Additions to property, plant and equipment and other Disposals of property, plant and equipment Increase in other assets (Decrease) increase in other liabilities Acquisition of subsidiary, net of cash ac quired
2002
945.6
474.0
663.3
252.1 19.0 58.3 47.2
266.1 239.3 55.0 23.2 12.5
5.0 223.5 15.9 48.1 13.9
82.5 (55.9) (103.5)
(136.3) (102.8) 60.9
269.1
30.1
175.4
1,514.4
922.0
1,082.2
Cash used by investing activities
Year Ended May 31, 2003 (In millions)
(400.8) (213.9)
(185.9)
11.6 (53.4) (0.9) (289.1)
(946.5)
(135.2) 55.4 16.9
(282.8)
14.8 (46.3) 1.8 -
15.6 (28.7) (6.9) -
(215.6)
(302.8)
Nike, Inc. GAAP Statement of Cash Flows (cont.)
2004
Cash provided (used) by financing activities: Proceeds from o l ng-term debt issuance Reduction in long-term debt including current portion Decrease in notes payable Proceeds from exercise of stock options and other stock issuances Repurchase of stock Dividends - common and preferred
Year Ended May 31, 2003 (In millions)
2002
153.8 (206.6)
90.4 (55.9)
329.9 (80.3)
(0.3) 253.6
(351.1) 44.2
(433.1) 59.5
(419.8) (179.2)
(196.3) (137.8)
(226.9) (128.9)
Cash used by financing activities
(398.5)
(606.5)
(479.8)
Effect of exchange rate changes
24.6
Net increase in cash and equivalents Cash and equivalents, beginning of year
194.0 634.0
58.5 575.5
271.5 304.0
Cash and equivalents, end of year
$ 828.00
$ 634.00
$ 575.50
Supplemental disclosure ofc ash flow information: Cash paid during the year for: Interest, net of capitalized interest Income taxes
$ 37.80 418.6
$ 38.90 330.2
$ 54.20 262.0
(41.4)
-28.1
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Direct Method for Cash from Operations Cash inflows ‐ Cash outflows = Cash from operations Northrop Grumman Corp. 2001
2002
Operating Activities Sources of cash Cash received from customers Other collections Interest received Income tax refunds received Other cash receipts C as h p ro vid ed b y o pe rat ing ac tiv it ie s Uses of cash C as h p aid to sup pl ie rs and em plo ye es Interst paid Income taxes paid Other cash payments Cash use d in operating activities Ne t c as h p ro vid ed b y o pe rating ac tivitie s
, 11,148 17 23 244 1 4, 53 4
, 7,003 17 15 10 8 ,4 83
1 3, 25 1 333 126 7 13,717 8 17
7 ,2 50 165 57 1 7,47 3 1 ,0 10
Problems with the Standard Statement 1. Change in operating cash should be included in the investment section, and the change in cash equivalents in the financing section 2. Transactions in financial assets are included in the investments section rather than in the financing section 3. Cash interest is included in the o eratin rather than in the financing section 4. Tax cash flows are all included in the operating section, and not allocated to operating and financing 5. The statement does not incorporate non‐cash transactions
1. Operating Cash and Cash in Financial Assets: Nike
Change in cash and cash equivalents
Increase in operating cash Increase in financial assets
$194 million
$ 8 million 186 $194 million
The determination of operating cash: use a normal percentage of sales for the industry
See Nike’s reformulated balance sheet in Exhibit 9.3 in chapter 9.
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5. Non‐cash Transactions •
Acquisitions with shares
•
Asset exchanges
•
Assets ac uired with debt
•
Capitalized leases
•
Installment purchases
•
Debt converted to equity
The Reformulated Statement of Cash Flows: the Adjustments GAAP Free Cash Flow
GAAP Financing Flow
+ Net cash interest outflow (after tax)
+ Net cash interest outflow (after tax)
+ Investments in financial assets
- Noncash financing
- Sale of financial assets
+ Purchase of financial assets
- Noncash investments
- Sales of financial assets
- Increase in operating cash
+ Increase in cash equivalents
= Free Cash Flow
= Financing Cash Flow
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