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September 2014

For a sample of 41 nonfinancial companies with market caps exceeding $10 billion, we find that restricted cash comprises approximately .80% of total assets. Restricted cash for some firms, however, can constitute several percent of total assets. Most companies report restricted cash as a current asset, though, depending on the restrictions placed on cash, a noncurrent designation may be used. Two companies include restricted cash with unrestricted cash and cash equivalents on the balance sheet.

Within our sample we find ten general types of restrictions placed on cash. Cash may be restricted for bankruptcy reorganization, equity transactions, financing obligations, hedging activities, income tax purposes, insurance claims, investment purposes, litigation purposes, operational obligations, and for regulatory purposes. Seven firms provide no explanation for the restrictions placed on cash.

Twenty two of the sample companies disclose the change in restricted cash on the statement of cash flows. Three companies classify the change as operating cash flow, sixteen firms as investing cash flow and four companies as financing cash flow. Two companies separate the change in restricted cash into both operating and financing activities. With a few exceptions, we find a general consistency between the primary reasons for the restrictions placed on cash and the classification of the change in restricted cash on the statement of cash flows.


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August 2014

In this study, for a sample of 120 companies, we identify and recast the statement of cash flows for the implied cash effects of six general categories of non-cash activity, transactions affecting 1) capital expenditures and operating activities, 2) capital expenditures and other investing activities, 3) capital expenditures and financing activities, 4) other investing activities and operating activities, 5) other investing activities and financing activities, and 6) financing activities and operating activities. We focus on the implied cash effects of two key non-cash activities from category three, debt issued for capital assets and capital lease financing of capital assets. These are transactions that directly affect capital expenditures and free cash flow. When revising the statement of cash flows to include the implied cash effects of these two non-cash transactions, we find a reduction in free cash flow in 62 instances for a median amount that comprised 2.8% of reported free cash flow. Among the 62 firms, 24 saw free cash flow decline by more than 5%, 16 by more than 10% and 9 by more than 25%.

Given the importance of non-cash capital expenditures to calculations of free cash flow, the FASB may wish to revise its stance regarding the exclusion of all non-cash activities from the statement of cash flows. As to analysts and investors, in the absence of changes to the reporting of non-cash activities, such users of financial statements will want to ensure that such non-cash activities are given explicit consideration when analyzing financial results.

This research report is adapted from the paper, Mulford, C. and Pfeffer, A., “Measuring the Effects of Non-cash Investing and Financing Activities,” Journal of Applied Research in Accounting and Finance, Vol. 9, No. 1, 2014, pp. 27-43.


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Quarter 1, 2014
Free Cash Margin Index:
Recession Lows

2.43%, 3.96% (Mar. 2001, Dec. 2008)

Current

4.38% (March 2014)

Recent High

7.18% (Mar. 2010)

July 2014

Free cash margin remains within a narrow range around 4.5%. For the twelve months ended March 2014, the
metric decreased to 4.38% from 4.56% in the period ended December 2013 and 4.52% for March 2013. The data
continue to show a weak and sputtering recovery. Median revenues declined slightly to $725.47 million for the
twelve months ended March 2014, from $726.07 million for the period ended December 2013 and $747.23
million for March 2013. Median revenues have now declined 8% from a post-recession high of $788.50 million
in December 2012. Operating profitability, as measured with operating cushion, also declined. The metric fell to
13.92% for the twelve months ended March 2014, down from 13.97% and 14.00%, respectively, for the periods
ending December 2013 and March 2013. With the decline in median revenues and operating profitability,
corporate managers began to restrict their spending, much as they did during the recession. For example,
inventories were reduced, declining to 22.27 revenue days at March 2014, down from 23.10 days at December
2013 and 23.83 days at March 2013. A bright spot, however, was a slight improvement in capital spending.
Capital expenditures as a percent of revenue increased to 3.52% for the twelve months ended March 2014 from
3.49% in December 2013. This is the first observed period of increasing capital spending since December 2012
when the metric stood at 3.66%.

Looking at individual industries, during the March 2014 reporting period, free cash margin was stable in sixteen
industries, increased in ten and declined in eighteen. Compared to Q4 2013, we are seeing more individual
industries with deteriorating free cash margin. Included in this report is a closer look at two separate industries:
Non-metallic and Industrial Metal Mining with increasing free cash margin and Consumer Goods with a sharp
decrease in free cash margin.

Data for this research were provided by Cash Flow Analytics, LLC., www.cashflowanalytics.com.
Charles Mulford is a principal in Cash Flow Analytics, LLC.


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An Analysis Using 2013 Data

May 2014

As the U.S. economy continues its slow recovery, companies are once again enjoying renewed, if limited, revenue growth. In terms of cash flow generation, as revenues grow, there are certain industries and companies that will benefit more than others. It is a common misbelief that growth requires a use of cash. The reality is that there are many companies that actually generate increasing amounts of free cash flow as revenues grow. These companies have what we refer to here as a positive free cash profile.

The purpose of this study is to analyze the free cash profile of 44 non-financial industries, looking at all firms within those industries that have revenues in excess of $100 million. Our goal is to identify those industries that can be expected to generate cash as revenues continue to grow, as well as those industries that will consume cash with growth. We also highlight specific industries to investigate factors underlying their free cash profile.

Overall, the median free cash profile for our sample is 3.35%, slightly higher than 2012’s median at 3.19%. There are 20 industries with a positive free cash profile, and 24 industries with a negative free cash profile—though even in these industries, there will be numerous firms with positive profiles. Industries with positive free cash profiles enjoy higher operating cushions and are more adept at managing operating working capital and limiting capital spending than industries with negative profiles.


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May 2014

We examine all aspects of defined benefit pension plans and the funded status of postretirement benefit plans. Our sample consists of companies in the Standard and Poor’s 100 with defined benefit plans and fiscal year ends ending between July 1, 2012 and June 30, 2013. A total of 76 out of the 100 firms in our sample have a defined benefit pension plan.

The median funded status for the plans in our sample is approximately -2.16% of total assets, indicating an underfunded status. The median funded status for postretirement benefit plans relative to total assets is -.74%.

The median discount rate employed by plans in our sample is 4.00%, with a range of between 3.43% and 5.25%. In our study the median rate of compensation increase is 4%, with a range of between 0% and 7.5%. The median long term rate of return on plan assets in our study is 7.5%, with a range of between 3.78% and 8.68%. Most pension plans in our study have the majority of their assets invested in fixed income and equity securities. The median investment in fixed income securities is 36.9%. The median for equities is 46.9%. Cash and cash equivalents have a median of 2.6%, real estate is 0.2%, and alternative investments is 5.7%.

The median percentage allocation among fair value hierarchies is 32.9% for level 1, 53.4% for level 2, and 6.8% for level 3. The ranges fluctuate across the different companies. The majority of companies have at least 90% of their pension assets invested in level 1 or level 2 categories. Twenty seven companies have greater than 10% of their pension assets invested in level 3 assets.


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Quarter 4, 2013
Free Cash Margin Index:
Recession Lows

2.43%, 3.96% (Mar. 2001, Dec. 2008)

Current

4.56% (December 2013)

Recent High

7.18% (Mar. 2010)

April 2014

In Q4 2013, median free cash margin decreased to 4.56% for the twelve months ended December 2013, from
4.68% for the twelve months ended September 2013, also down from 4.76% in December 2012. As it has for
much of the time frame studied, except for the 2008 – 2009 recession, free cash margin continues to operate
within a narrow range of between 4.5% and 5.0%.

While we would rather see an improving free cash margin, there are positive developments behind the slight
decrease this quarter. Median revenues increased to $726.07 million, up from $705.28 million for the twelve
months ended September 2013 and down from $788.50 million in the period ending December 2012. The
quarterly rise of 2.95% offers a positive signal in the U.S. economy, against its year-over-year decline of 7.92%.
Along with rising revenues, operating profitability improved, driven higher by improving gross margin and level
SG&A spending. The median cash cycle improved considerably as receivables, inventory and payables days all
contributed. The fourth quarter data promotes an improving economy, but does not yet imply a strong economy.

Looking at individual industries during the December 2013 reporting period, free cash margin was stable in
nineteen industries, increased in eleven and declined in fourteen. Compared to Q3 2013, we are seeing more
individual industries with stable free cash margin. Included in this report is a closer look at two separate
industries: Consumer Goods with increasing free cash margin and Retail with decreasing free cash margin.

Data for this research were provided by Cash Flow Analytics, LLC., www.cashflowanalytics.com.
Charles Mulford is a principal in Cash Flow Analytics, LLC.


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March 2014

In this study, we examine unrecognized tax benefits for the firms comprising the S&P 100. Our objective is to clarify their accounting and measure their significance relative to assets, income tax expense and net income.

While the median unrecognized tax benefit liability for our sample is approximately .8% of total assets, there are some firms with significant amounts of unrecognized tax benefit liabilities approaching ten percent of total assets. One required disclosure is the portion of the unrecognized tax benefit liability that, if recognized, would affect income tax expense. The median measure for this metric calculated across the sample is 77.7%. In effect, for the median firm, if unrecognized tax benefits were to be recognized, 77.7% of the unrecognized benefit would serve to reduce income tax expense and raise net income. Measured as a percentage of net income, the median amount of the portion of the unrecognized tax benefit liability that, if recognized, would affect income tax expense and net income is 11.8%. Given the level of judgment that must be employed in accounting for unrecognized tax benefits, the unrecognized tax benefit liability serves as an after-tax reserve. Adjustments to this reserve can have a material effect on net income.

During 2012, 90 sample firms reported a change in the unrecognized tax benefit liability. For the 50 companies that raised the liability, the median increase in income tax expense is 5.7%, leading to a median reduction in net income of 1.8%. For the 40 companies that lowered the liability, the median reduction in income tax expense is 1.9%, leading to a median increase in net income of 1.0%.

For analysts and investors these findings highlight the potential material effects that changes to unrecognized tax benefits can have on income tax expense and net income. For CFOs, these results offer benchmarking data for evaluating uncertain tax positions relative to other firms. For regulators and accounting standard setters these results offer insight into how accounting and disclosure rules for unrecognized tax benefits are being applied. Finally, for tax authorities, the data compiled here provide insight into the magnitude of uncertain tax positions.


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Quarter 3, 2013
Free Cash Margin Index:
Recession Lows

2.43%, 3.96% (Mar. 2001, Dec. 2008)

Current

4.68% (Sept. 2013)

Recent High

7.18% (Mar. 2010)

January 2014

In Q3 2013, median free cash margin increased, reaching 4.68% for the twelve months ended September 2013, up from 4.63% for the twelve months ended June 2013, yet down from 4.72% in June 2012. A decrease in the overall cash cycle and capital spending were the primary drivers of the increase, outweighing the drop in operating profitability. The cash cycle reduction was driven by a decrease in inventory days and an increase in payables days. Free cash margin continues to operate within a narrow range between 4.5% and 5%.

As reported last period, there are concerns behind the increase in free cash margin. Median revenues decreased to $705.28 million, down from $736.85 million for the twelve months ended June 2013 and $776.47 million in the period ending September 2012. The quarterly decline of 4.28% and year-over-year decline of 9.17% signal a slow-down in the U.S. economy. The decline in median revenues accompanied by an increase in free cash margin, driven primarily by reductions in capital spending and the cash cycle, are similar to developments observed during the recession. The third quarter data do not imply a strong and strengthening economy.


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