4.11 Presentation of Free Cash Flow
Free cash flow is a non-GAAP measure, commonly defined as cash flows
from operating activities as presented in the statement of cash flows less capital
expenditures. According to C&DI Question 102.07, the measure does not violate
the liquidity measure prohibition of Item 10(e) even though some of the capital
expenditures may have been or will be paid in cash. In addition to capital
expenditures, other adjustments may also be used to derive free cash flow. C&DI
Question 102.07 notes that the measure is not uniformly defined, and its title does
not describe how it is calculated. Therefore, registrants must clearly describe how
free cash flow is calculated and disclose the other information required by Item
10(e), including a reconciliation.
C&DIs — Non-GAAP Financial Measures
Question: Some
companies present a measure of “free cash flow,” which is
typically calculated as cash flows from operating activities
as presented in the statement of cash flows under GAAP, less
capital expenditures. Does Item 10(e)(1)(ii) of Regulation
S-K prohibit this measure in documents filed with the
Commission?
Answer: No. The
deduction of capital expenditures from the GAAP financial
measure of cash flows from operating activities would not
violate the prohibitions in Item 10(e)(1)(ii). However,
companies should be aware that this measure does not have a
uniform definition and its title does not describe how it is
calculated. Accordingly, a clear description of how this
measure is calculated, as well as the necessary
reconciliation, should accompany the measure where it is
used. Companies should also avoid inappropriate or
potentially misleading inferences about its usefulness. For
example, “free cash flow” should not be used in a manner
that inappropriately implies that the measure represents the
residual cash flow available for discretionary expenditures,
since many companies have mandatory debt service
requirements or other non-discretionary expenditures that
are not deducted from the measure. Also, free cash flow is a
liquidity measure that must not be presented on a per share
basis. See Question 102.05. [May 17, 2016]
Since free cash flow is presumed to be a liquidity measure,
registrants would be prohibited from disclosing free cash flow per share. See the
discussion of non-GAAP per-share measures in Section 4.4.