Share repurchases

CAN CASH FLOW CONTINUE TO SUPPORT SOARING SHARE
REPURCHASES? January 30, 2015
Will Becker
wbecker@behindthenumbers.com
1
Despite a broad trading slowdown, companies are continuing
to repurchase their own shares at the briskest clip since the
financial crisis and helping to fuel the stock market rally.
According to research firm Birinyi Associates, 740 firms had
authorized repurchase programs through August of last year,
the most since 2008. Meanwhile, in terms of participation,
FactSet showed that 374 companies (or 75% of the S&P 500
index) repurchased shares in 3Q14, spending $143.4 billion for
the quarter, marking a year-over-year increase of 16%. On a
trailing 12-month basis through 9/30/14, companies spent
$567.2 billion on share repurchases, a year-over-year increase
of 27%.
What is interesting is that this growth in buybacks comes as
overall stock-market volume has fallen, helping magnify the
impact of repurchases. According to WSJ (9/15/14), in mid-
August, about 25% of non-electronic trades executed at
Goldman Sachs Group, excluding the high-frequency trading
(HFT) that has come to dominate the market, involved
companies buying back shares. That is more than twice the
long-run trend, according to a person familiar with the matter.
Meanwhile, companies with the largest buyback programs by
dollar value have outperformed the broader market by 20%
since 2008, according to an analysis by Barclays PLC.
Jonathan Glionna, head of US equity strategy at Barclays,
said,
"There are a couple of reasons why companies do
buybacks. One is that it seems to work; it makes stocks
go up."
However, this explained direct causality is hardly scientific and
we would argue that even recent history shows this is a very
flawed way of thinking. On a basic level, a company creates
value when it is buying back shares below their intrinsic value.
Conversely, it destroys value when it buys back shares above
their intrinsic value. Unfortunately, management rarely views
share repurchases under these terms, instead looking at them
almost as a default option when companies have strong cash
flow but can’t find suitable capital investments. Of course,
companies typically have more difficulty finding good
investments when asset prices are high and returns on
investment are low. With a dearth of internal projects meeting
the cost of capital, too many companies turn to buybacks. Yet,
it's precisely these periods when one can almost be assured
that stock prices are over-inflated, as well. In essence,
companies are merely exchanging one form of malinvestment
(capital expenditures) for another (repurchases).
Thus, managements seem to follow the herd-mentality when it
comes to buybacks as the activity is largely ignored when
interest in the stock market is low and stock prices are at or
near their companies’ intrinsic values. Cash is held dearly by
management and inactivity reigns despite attractive asset
prices. Meanwhile, share repurchases peak at the height of
bull markets when intrinsic values are sky-high. Cash is
considered trash and management feels it has to do something
with it. We note that repurchases recently bottomed at the
heart of the financial crisis when stocks were their cheapest,
and are now accelerating six years later after the S&P 500 has
more than tripled. Does this seem to be a smart allocation of
cash or are we seeing another massive round of
malinvestment?
When companies repurchase their own shares, they decrease
the number of outstanding stock available, which theoretically
increases the stock value. Many investors consider this to be
the most tax efficient method of returning cash to shareholders,
since there is no tax on repurchasing shares. Remember, the
highest tax on qualified dividend income is 15% for the top
income tax bracket. When companies earn money, they pay
taxes on it. When companies pay dividends, dividends are
taxed again at the individual level. However, these investors
seem to forget that the holders of stock who sold to the
company end up paying a capital gains tax on their profit.
While not all shareholders sell their shares to companies that
are repurchasing their own stock, the ones that do could end
up with a higher tax bill at the end of the day, especially if they
were longer-term buy-and-hold investors. The current long-
term capital gains rate is 20% for high-income investors. On
top of that, households making more than $200,000 may also
be subject to a 3.8% Medicare surtax on some of their
investment income. That makes for a current top rate of
23.8%. Meanwhile, in his 1/20/15 State of the Union speech,
President Obama called for raising the cap gains tax rate on
households making over $500,000 to 28%.
Additionally, shareholders must realize that when a company
spends large amounts of money on share repurchases when it
could be paying higher dividends instead, the company’s
management is limiting the shareholders’ control and
increasing theirs. Shareholders are essentially relying on
management’s ability to judge whether it’s an appropriate time
to repurchase shares, whereas when shareholders are paid a
dividend they have complete control over that choice. Thus,
we prefer the flexibility of dividends for shareholders since it
allows them to direct their flow of income to where they think
the best investment opportunities are at any given time. Share
repurchases simply lack that flexibility.
Next, in theory, share repurchases should equate to lower
share counts, which should then inflate earnings per share
(EPS). However, we see a large number of companies that

Can Cash Flow Continue To Support Soaring Share Repurchases? Behind The Numbers
Will Becker January 30, 2015
2
use share repurchases as a clever way to offset shareholder
dilution from exercised stock options from management. We
are always wary of companies that make large share
repurchases yet fail to reduce their share count due to new
issuance of stock to redeem employee stock options. In fact,
despite the elevated levels of repurchases, one could argue
that lower share count has barely helped EPS growth lately.
According to research by Standard & Poor’s, Compustat, and
JP Morgan Asset Management, EPS for the S&P 500
companies advanced by 22% year-over-year for 4Q13, yet
lower share count only accounted for 0.1% of this increase:
To make matters even worse, since buybacks are typically
initiated in good times when stock prices are high, these
corporations end up purchasing their own stock at inflated
prices, only to have many of these same shares then
redeemed by management as compensation committees
increasingly hand out these perks in good times.
So what happens to heavy share-repurchasing companies
when the bad times hit? General Electric (GE) showed in 2008
how quickly repurchases can go wrong. According to The
Dividend Growth Investor (6/23/09),
In 2007, the company spent $12.319 billion buying back stock,
which reduced the share count from 10,394 million to 10,218
million, or a decrease of 176 million shares. This comes out to
$70/share, whereas the high and low prices of GE stock in
2007 were $42.15 and $34.50, respectively. This sure tells us
that the company gave out at least one hundred million shares
through option exercises. Facing a liquidity crunch in 2008, the
company was forced to sell $12 billion worth of stock at
$22.25/share, much lower than the price it had paid for
buybacks over the past 4 years. Back in February 2009, the
company cut its dividend as well in order to conserve cash.
Thus, GE insiders got filthy rich in 2007-08, while the same GE
shareholders that held the stock through the financial crisis
quickly found themselves holding diluted shares of a company
that held more debt, a cut dividend and a heavily depressed
share price.
Lastly, we are perhaps most concerned with companies that
are willing to take on large amounts of debt to repurchase
shares. With the 10-year Treasury yield heading back down to
approximately 1.8% off its 3% range back in late 2013, more
companies are now able to justify bond-backed share
repurchases these days. Even companies with low dividend
yields may find bond-backed repos hard to turn down.
Meanwhile, there are likely few bankers that will discourage an
S&P 500 company - a super safe credit - to take on more debt
in the interest of appeasing their shareholders through
repurchases, perhaps even when interest rates are heading
up. In Reuters (9/6/13), Jim Turner, head of debt capital
markets at BNP Paribas, said,
"When rates go up, any kind of debt financing becomes
less attractive, but on a historical basis rates are still very
low. If a company has debt capacity at its current ratings,
and it makes sense from a capital optimization point of
view, share repurchases with bond proceeds still make
good sense."
However, once again, we point to the GE example above as a
prime example of what can go wrong when shareholders rely
on repurchases to drive higher stock prices. Meanwhile, high
debt can only potentially compound the problem, as it gives the
company less financial flexibility in an economic downturn to
make necessary capital expenditures, maintain a dividend, or
cover other cash commitments to help the company recover.
In short, when it comes to repurchases, we believe financial
discipline must be strictly maintained.
Not surprisingly, with the U.S. stock market probing record
levels, share buybacks are expected to continue at a brisk
pace in 2015. According to CNBC (11/11/14), an analysis by
Goldman Sachs expects repurchases to increase by 18% to
$707 billion in 2015. Goldman strategist David Kosten wrote,
"Since the start of (the fourth quarter), a sector-neutral
basket of 50 stocks with the highest buyback yields has
outpaced the S&P 500. From a strategic perspective,
buybacks have been the largest source of overall U.S.
equity demand in recent years."
Yet, what is interesting is that Goldman projects only modest
growth in capital expenditures for S&P 500 companies in 2015.
Though the current annualized pace for CapEx—at about $2.1
trillion, according to the latest Bureau of Economic Analysis
figures—outpaces the aggregate total for buybacks, the
buyback pace is well ahead. After increasing by 9.7% year-
over-year in 2Q14, the pace of the CapEx increase slowed to
5.5% in 3Q14. Goldman expects declining oil prices will sap
CapEx activity at energy firms, resulting in just a 6% gain for
2015 even as nonfinancial companies sit on nearly $1.9 trillion
in cash.
However, for this exercise, we are going to challenge
Goldman’s expectation that the S&P 500 can boost share
repurchases by 18% in 2015. Frankly, we believe free cash
flow for many of these companies could soon encounter a
number of headwinds, thereby making it more difficult for them
to expand their buyback programs. For some, the biggest
hurdle that may pressure cash flow is restructurings. While
most on Wall Street view restructurings as one-time events
that largely deal with realigning businesses, reducing asset
values and thereby lowering future depreciation, many of these
charges were taken years ago and are still consuming cash.
When companies shut down a business and layoff a number of
employees, they are then required to make severance
payments, cover healthcare and life insurance costs, and
contribute to pension plans. As we addressed in our 10/31/14
Pensions Must Account For Longevity Risk report, the Society
of Actuaries (SOA) updated their mortality estimates for the
first time in 14 years, showing life expectancies for 65-year-old
Americans is up more than two years. This rising longevity risk
will be recognized in the form of higher pension contributions
for many companies. Additionally, companies must pay to
break leases or cancel outstanding purchase orders or

3
distribution agreements as part of these restructurings. Thus,
these are big cash costs that can squeeze cash flow for a
number of restructuring companies and force some of them to
cut back on their share repurchases and/or other cash
commitments.
We screened the S&P 500 index, excluding Financials, and
looked for companies that have recently made large share
repurchases and taken a string of sizeable restructuring
charges. In particular, we focused on those charges in which a
significant amount of it was taken in cash, thereby pressuring
operating cash flow. For example, while a company’s first
restructuring may have been a $200 million charge with only
about $55 million of that in cash, they may now be taking $500
million charges and $300 million is cash. Additionally, we
screened for companies that have already drawn down their
working capital so that source of cash is now gone. Finally, we
looked at capital expenditures to see which companies have
already slashed this spending to free cash and will likely have
to ramp it back up to grow business and maintain existing
capital. These are the companies that would seem to be in the
most jeopardy of having to reduce their share repurchase
activity going forward. We focused on the following four
companies:
Cisco Systems – CSCO
 CSCO has recently undertaken two large
restructuring plans – the Fiscal 2011 Plan and the
Fiscal 2014 Plan – to realign businesses, consolidate
excess facilities and sell manufacturing operations.
Cash payments for restructurings have been heading
much higher.
 Still, CSCO’s operations have not improved with
declining margins and negative sales growth leading
to lower earnings.
 To boost cash, CSCO recently benefited from working
capital improvements and CapEx remains fairly flat.
However, the company recently initiated its first
dividend program, which continues to ramp up.
 Share repurchases nearly doubled over the last
twelve months ended 10/25/14, leading to a large
adjusted free cash flow deficit for the period.
 CSCO continues to pay its executives heavily in
stock, thereby minimizing share count reduction.
 Although CSCO’s balance sheet remains fairly solid,
debt jumped noticeably over the last year.
General Mills – GIS
 GIS has been a regular restructurer and has two big
plans – Project Catalyst and Project Century –
currently in progress.
 Yet, margins have been steadily falling for years,
while sales fell year-over-year for last twelve months
ended 11/23/14.
 Excluding working capital adjustments, operating
cash flow declined over the last twelve months ended
11/23/14. Meanwhile, with CapEx heading higher,
dividend coverage tightened noticeably over this
period.
 With share repurchases jumping, GIS has now
reported an adjusted free cash flow deficit over each
of the last two twelve-month periods ended
November.
 GIS continues to dole out stock for compensation and
appears willing to take on debt to boost its share
repurchase program.
 The company’s net debt-to-EBITDA ratio was at 3.16
at 11/23/14.
Coca-Cola – KO
 KO has recently been involved in a number of
productivity, integration and restructuring initiatives.
Cash restructuring charges have been large lately.
 Since acquiring the North American bottling
operations of Coca-Cola Enterprises in October 2010,
margins have improved slightly, but recent sales
growth has been negative.
cash flow has remained fairly flat over the last three
years. Meanwhile, CapEx spending remains at lower
levels while dividend coverage has tightened.
 Share repurchases remain at elevated levels and KO
has reported adjusted free cash flow deficits over the
last four twelve-month periods ended September.
 KO continues to pay its executive very handsomely in
stock, causing share count to decline minimally
despite heavy buybacks.
 KO’s debt levels have more than tripled over the last
four years and the company’s balance sheet is no
longer solid.
Philip Morris International – PM
 PM has recorded a number of separation program
and contract termination charges. Cash charges
have ballooned lately.
 Yet, margins are well-below 2010 levels and sales
growth has been negative essentially over the last two
years.
cash flow declined by 7% year-over-year for the
twelve months ended 9/30/14.
 Meanwhile, with CapEx and dividends heading
steadily higher, free cash flow continues to shrink
noticeably.
 With large share repurchases, PM has reported
adjusted free cash flow deficits in four of the last five
twelve-month periods ended September.
 PM’s balance sheet has taken a sizeable hit, as total
debt has nearly doubled over the last four years and
the shareholders’ equity balance is now negative.

4
Ticker Short Name TTM NI
TTM NI
(-4) %chg Shares
Shares
(-4) %chg Repos
Repos
(-4) %chg Res Res(-4)
TTM
CPX
TTM
CPX(-4) %chg W/C Adj Adj FCF
THC Tenet Healthcare 84 219 -62% 98 99 -1% -100 -400 -75% 148 45 -1,027 -546 88% -1,659 -404
MOS Mosaic Co 843 1,621 -48% 373 426 -12% -2,508 - #DIV/0! 67 - -1,030 -1,624 -37% 317 -1,518
LLY Eli Lilly & Co 2,987 4,646 -36% 1,113 1,127 -1% -1,000 -1,919 -48% 72 226 -1,038 -939 11% 441 601
DD Du Pont (Ei) 3,612 5,154 -30% 906 926 -2% -2,000 -1,000 100% 114 99 -1,970 -1,877 5% -1,314 -1,947
SPLS Staples Inc 637 856 -26% 640 654 -2% -220 -393 -44% 126 241 -368 -350 5% -39 245
BRCM Broadcom Corp 937 1,169 -20% 592 568 4% -420 -627 -33% 159 13 -270 -227 19% 33 718
FLIR FLIR Systems 187 226 -18% 141 142 -1% -149 -218 -32% 41 1 -56 -56 0% 23 55
ADBE Adobe Sys Inc 332 373 -11% 497 496 0% -774 -1,100 -30% 20 26 -148 -188 -21% 396 365
LH Laboratory Cp 576 643 -11% 85 88 -3% -480 -901 -47% 19 39 -217 -204 6% -36 77
ADT ADT Corp 370 413 -10% 174 209 -17% -1,384 -1,241 12% 17 23 -742 -651 14% N/A -739
ADI Analog Devices 604 670 -10% 311 311 0% -356 -64 454% 37 30 -178 -123 45% N/A -117
STX Seagate Technology 1,731 1,907 -9% 327 359 -9% -1,913 -1,197 60% 28 5 -570 -684 -17% -284 -567
XRX Xerox Corp 1,300 1,419 -8% 1,142 1,231 -7% -1,297 -561 131% 149 151 -370 -358 3% -463 194
WDC Western Digital 1,855 2,018 -8% 234 236 -1% -889 -774 15% 45 112 -652 -706 -8% -48 1,128
HOT Starwood Hotels 531 575 -8% 180 193 -6% -1,106 -417 165% 24 -2 -489 -348 41% 235 -1,437
CAH Cardinal Health 1,286 1,384 -7% 334 341 -2% -983 -307 220% 40 77 -259 -195 33% -47 -37
CSCO Cisco Systems 9,402 10,021 -6% 5,109 5,351 -5% -8,603 -4,488 92% 499 283 -1,245 -1,210 3% 1,208 -1,491
IP International Paper 1,061 1,122 -5% 423 446 -5% -1,333 -220 506% 427 135 -1,400 -1,141 23% -246 -368
GIS General Mills 1,700 1,778 -4% 597 626 -5% -1,850 -1,430 29% 229 11 -710 -621 14% -108 -1,162
NLSN Nielsen Nv 443 464 -4% 381 378 1% -97 - #DIV/0! 99 91 -147 -139 6% -20 431
DNB Dun & Bradstreet 286 299 -4% 36 38 -6% -287 -626 -54% 15 17 -13 -11 15% -4 -53
SNDK Sandisk Corp 1,172 1,212 -3% 221 225 -2% -1,341 -1,590 -16% 33 - -233 -213 9% 44 -110
EMC EMC Corp 3,019 3,118 -3% 2,035 2,058 -1% -2,990 -3,141 -5% 188 - -963 -969 -1% 1,011 1,679
ORCL Oracle Corp 11,539 11,914 -3% 4,398 4,506 -2% -8,099 -10,750 -25% 195 184 -727 -578 26% -111 4,298
MSFT Microsoft Corp 22,539 23,232 -3% 8,255 8,346 -1% -8,016 -5,916 35% 1,267 - -5,536 -4,885 13% 2,620 9,558
PM Philip Morris Intl 8,490 8,725 -3% 1,556 1,606 -3% -4,497 -6,483 -31% 315 41 -1,183 -1,158 2% -722 -2,964
CTXS Citrix Systems 371 378 -2% 164 187 -13% -1,851 -232 696% 17 - -152 -162 -7% 114 -1,117
SYMC Symantec Corp 1,162 1,184 -2% 690 696 -1% -500 -575 -13% 115 272 -341 -286 19% -280 -12
KO Coca-Cola Co 9,213 9,372 -2% 4,375 4,416 -1% -3,903 -4,832 -19% 301 473 -2,543 -2,434 4% -781 -792
CSC Computer Science 644 654 -1% 140 148 -5% -829 -534 55% 57 201 -433 -368 18% N/A 183
MRK Merck & Co 10,310 10,384 -1% 2,861 2,927 -2% -6,279 -7,472 -16% 1,229 1,335 -1,256 -1,897 -34% 650 -776
PBI Pitney Bowes Inc 402 405 -1% 201 202 0% -50 - #DIV/0! 53 54 -155 -152 2% 120 153
RL Ralph Lauren 753 747 1% 88 90 -3% -629 -411 53% 22 11 -352 -374 -6% -110 -174
MDT Medtronic Inc 3,937 3,887 1% 984 998 -1% -2,120 -2,216 -4% 90 190 -410 -442 -7% 233 475
HPQ Hewlett-Packard 7,145 6,938 3% 1,839 1,908 -4% -2,728 -1,532 78% 1,619 990 -3,853 -3,199 20% 4,079 4,568
SIAL Sigma-Aldrich 510 494 3% 119 120 -1% -116 -140 -17% 27 11 -114 -100 14% -31 302
GLW Corning Inc 1,966 1,899 4% 1,282 1,447 -11% -3,375 -581 481% 122 133 -1,077 -1,208 -11% 18 -150
ADP Automatic Data 1,488 1,425 4% 482 482 0% -463 -756 -39% 15 - -207 -179 16% 358 546
DAL Delta Air Lines 2,833 2,699 5% N/A 851 N/A -757 -250 203% 716 402 -2,541 -2,568 -1% N/A 1,971
EMN Eastman Chemical 1,033 982 5% 148 154 -4% -535 -113 373% 129 107 -577 -480 20% -52 132
HSY Hershey Co 860 817 5% 221 224 -1% -543 -319 70% 26 30 -323 -273 18% -166 -344
NWL Newell Rubbermaid 557 528 6% 271 287 -6% -643 -143 348% 57 116 -154 -133 16% -64 -327
STJ St Jude Medical 1,148 1,085 6% 286 289 -1% -700 -1,301 -46% 337 305 -190 -263 -28% 98 -59
COV Covidien Plc 1,948 1,837 6% 454 450 1% -109 -1,763 -94% 86 154 -352 -427 -18% -494 1,185
TWX Time Warner Inc 3,903 3,650 7% 842 909 -7% -5,586 -3,879 44% 513 220 -603 -513 18% -7,964 -3,736
M Macy's Inc 1,601 1,493 7% 345 368 -6% -1,799 -1,607 12% 88 5 -709 -615 15% -279 -407
YHOO Yahoo! Inc 1,498 1,389 8% 979 1,013 -3% -2,782 -4,565 -39% 78 73 -413 -379 9% 196 -2,061
TYC Tyco International 939 870 8% 427 463 -8% -1,833 -300 511% 48 122 -288 -270 7% -23 -1,520
CFN CareFusion Corp 511 472 8% 236 231 2% -566 -514 10% 51 27 -96 -84 14% 70 17
SYK Stryker Corp 1,727 1,583 9% 378 378 0% -165 -252 -35% 26 66 -228 -188 21% 598 940
WM Waste Management 1,106 1,011 9% 458 469 -2% -839 - #DIV/0! 74 29 -1,228 -1,202 2% -5 -262
McCormick-N/V 448 408 10% 129 132 -2% -264 -126 109% 27 - -124 -102 21% -43 -64

5
Ticker Short Name TTM NI
TTM NI
(-4) %chg Shares
Shares
(-4) %chg Repos
Repos
(-4) %chg Res Res(-4)
TTM
CPX
TTM
CPX(-4) %chg W/C Adj Adj FCF
TWC Time Warner Cable 2,082 1,887 10% 280 283 -1% -1,212 -2,419 -50% 225 98 -4,006 -3,275 22% 591 94
CBS CBS Corp-B 2,014 1,822 11% 520 601 -13% -3,151 -2,162 46% 26 - -245 -214 14% N/A -2,841
MDLZ Mondelez Inter-A 2,951 2,643 12% 1,680 1,754 -4% -3,127 -793 294% 423 204 -1,723 -1,409 22% 1,119 551
DLPH Delphi Automotive 1,492 1,313 14% 297 308 -4% -766 -456 68% 174 249 -836 -654 28% 43 31
JCI Johnson Controls 2,225 1,954 14% 657 664 -1% -650 -1,549 -58% 324 957 -1,134 -1,351 -16% 864 166
WHR Whirlpool Corp 863 755 14% 78 79 -1% -235 -140 68% 157 203 -683 -517 32% -429 -239
PKI PerkinElmer Inc 264 228 16% 113 112 1% -39 -127 -69% 24 28 -30 -50 -40% -90 156
TEL TE Connectivity 1,582 1,367 16% 408 412 -1% -578 -844 -32% 59 311 -673 -615 9% -279 389
CTAS Cintas Corp 375 323 16% 117 120 -2% -270 -221 22% 26 - -182 -174 4% 102 133
KRFT Kraft Foods Group 1,744 1,481 18% 590 596 -1% -473 - #DIV/0! 7 138 -509 -532 -4% -840 -432
IPG Interpublic Group 419 354 18% 418 416 0% -349 -685 -49% 61 - -176 -162 9% -101 -37
NTAP NetApp Inc 775 656 18% 313 342 -8% -1,600 -1,242 29% 39 50 -223 -282 -21% 114 -680
INTC Intel Corp 11,786 9,942 19% 4,769 4,967 -4% -11,106 -2,440 355% 295 240 -10,105 -10,711 -6% 69 -4,863
XYL Xylem Inc 351 296 19% 182 185 -1% -161 -53 204% 18 40 -113 -122 -7% 22 47
WY Weyerhaeuser Co 744 627 19% 525 583 -10% -123 - #DIV/0! 417 14 -385 -245 57% -171 40
BLL Ball Corp 562 461 22% 138 145 -5% -475 -494 -4% 8 148 -319 -408 -22% 256 170
JNPR Juniper Networks 485 393 23% 438 505 -13% -2,007 -583 244% 175 32 -191 -275 -31% -18 -1,335
DISCA Discovery Comm-A 1,307 1,050 24% 560 705 -21% -1,413 -1,203 17% 24 13 -124 -100 24% 46 -289
CPB Campbell Soup Co 958 763 26% 313 314 0% -147 -138 7% 34 50 -357 -347 3% -111 150
ECL Ecolab Inc 1,300 1,029 26% 300 301 0% -420 -245 71% 44 186 -690 -604 14% -227 332
AGN Allergan Inc 1,763 1,385 27% 298 297 0% -836 -835 0% 209 5 -264 -144 84% -97 552
TXN Texas Instrument 2,716 2,034 34% 1,056 1,095 -3% -2,867 -2,734 5% 38 112 -367 -401 -8% -51 -708
DOW Dow Chemical Co 3,514 2,577 36% 1,179 1,213 -3% -3,273 -134 2343% -22 986 -3,350 -2,427 38% -270 -2,617
SEE Sealed Air Corp 346 253 37% 212 196 8% -137 -5 2942% 44 94 -128 -107 20% -763 -503
GT Goodyear Tire 830 599 39% 275 247 11% -97 - #DIV/0! 97 149 -1,068 -1,073 0% 60 -945
BSX Boston Scientific 914 610 50% 1,326 1,339 -1% -350 -375 -7% 83 98 -264 -223 18% N/A 1,022
ADM Archer-Daniels 2,027 1,171 73% 646 658 -2% -708 -95 645% 31 - -859 -1,022 -16% 2,871 2,619
LUV Southwest Air 1,397 805 74% 679 700 -3% -955 -541 77% 48 - -1,807 -1,446 25% 377 -1

CAN CASH FLOW CONTINUE TO SUPPORT SOARING SHARE REPURCHASES? Behind The Numbers
6
CISCO SYSTEMS
Cisco Systems (CSCO) is a leading designer, manufacturer
and seller of Internet Protocol (IP) based networking
products and services related to the communications and
information technology industry worldwide. In recent years,
CSCO has announced several restructuring plans and
taken heavy charges to restructure and realign its
businesses. According to its 7/26/14 10-K,
In August 2013, the Company announced a workforce
reduction plan that would impact up to 4,000
employees, or 5% of the Company’s global workforce.
In connection with this restructuring action, the
Company incurred charges of $418 million during fiscal
2014 (included as part of the charges discussed
below). The Company has completed the Fiscal 2014
restructuring and does not expect any remaining
charges related to this action.
The Fiscal 2011 Plans consist primarily of the
realignment and restructuring of the Company’s
business announced in July 2011 and of certain
consumer product lines as announced during April
2011. The Company completed the Fiscal 2011 Plans
at the end of fiscal 2013. The Company incurred
cumulative charges of approximately $1.1 billion in
connection with these plans.
As part of the Fiscal 2011 Plans, other charges
incurred during fiscal 2012 were primarily for the
consolidation of excess facilities, as well as an
incremental charge related to the sale of the
Company’s Juarez, Mexico manufacturing operations,
which sale was completed in the first quarter of fiscal
2012.
The following table summarizes the activities related to the
restructuring and other charges pursuant to the Company’s
Fiscal 2014 Plan and the Fiscal 2011 Plans related to the
realignment and restructuring of the Company’s business
(in millions):
Restructuring Breakouts – Fiscal 2011 and 2014 Plans
(in $mil)
FY11 Plans
Voluntary
Retirement
Employee
Severance
Other
Liability, 7/11 17 234 11
FY12 charges - 299 54
Estimate change related to
FY11 charges - (49) -
Cash payments (17) (401) (18)
Non-cash items - - (20)
Liability, 7/12 - 83 27
FY13 gross charges - 111 (6)
Cash payments - (173) (11)
Liability, 7/13 - 21 7
FY14 gross charges - - -
Cash payments - (19) (3)
Non-cash items - (2) (1)
Liability, 7/14 - - 3
FY14 Plan
Employee
Severance
Other Total
Liability, 7/11 - - 262
FY12 charges - - 353
Estimate change related to
FY11 charges - - (49)
Cash payments - - (436)
Liability, 7/12 - - 110
FY13 gross charges - - 105
Cash payments - - (184)
Liability, 7/13 - - 28
FY14 gross charges 366 52 418
Cash payments (326) (4) (352)
Non-cash items - (22) (25)
Liability, 7/14 40 26 69
Thus, as one can see, CSCO has taken some large
restructurings in recent fiscal years and cash payments
have not been small. Meanwhile, CSCO plans more heavy
restructuring as the most recent 10-K disclosed its Fiscal
2015 Plan,
In August 2014 the Company announced a
restructuring plan that will impact up to 6,000
employees, representing approximately 8% of its
global workforce. The Company expects to take action
under this plan beginning in the first quarter of fiscal
2015. The Company currently estimates that it will
recognize pre-tax charges in an amount not expected
to exceed $700 million, consisting of severance and
other one-time termination benefits and other
associated costs. These charges are primarily cash-
based. The Company expects that approximately
$250 million to $350 million of these charges will be
recognized during the first quarter of fiscal 2015, with
the remaining amount to be recognized during the rest
of fiscal 2015.
In connection with the Fiscal 2015 Plan, CSCO incurred
cumulative charges of $318 million for its fiscal first quarter
ended 10/25/14, with cash payments in the form of
employee severance taking up nearly half of this charge:
Restructuring Breakout – Fiscal 2014 and Prior Plans (in $mil)
Fiscal 2014 & Prior
Plans
Fiscal 2015 Plan
Employee
Severance Other
Employee
Severance
Other Total
Liability, 7/14 40 29 - - 69
FY15 gross
charges - - 322 (4) 318
Cash
payments (13) - (142) - (155)
Non-cash
items - (4) - 4 -
Liability,
10/14 27 25 180 - 232
Meanwhile, with CSCO estimating it will recognize pre-tax
charges of up to $700 million for the Fiscal 2015 Plan, we
can expect further large restructuring charges to take place
over the remaining quarters of FY15. So how has CSCO

7
responded operationally from its recent heavy
restructurings? Frankly, not well:
Recent Operating Performance
LTM-10/25 FY14 FY13 FY12 FY11
Sales growth (3.1%) (3.0%) 5.5% 6.6% 7.9%
Gross margin 58.5% 58.9% 60.6% 61.2% 61.4%
EBITDA margin 24.7% 25.0% 27.9% 27.5% 23.5%
Next, let’s take a look at CSCO’s adjusted free cash flow
(after covering share repurchases and dividends) over the
last five twelve-month periods ended October:
Adjusted Free Cash Flow (in $mil)
Twelve Months
Ended: 10/14 10/13 10/12 10/11 10/10
OCF before W/C
impact 10,966 13,422 10,902 8,806 10,161
Working capital
impact 1,208 (344) 721 1,939 191
Reported OCF 12,174 13,078 11,623 10,745 10,352
CapEx 1,245 1,210 1,126 1,113 1,174
FCF 10,929 11,868 10,497 9,632 9,178
Dividend 3,817 3,480 1,923 980 -
% FCF paid in
dividends 34.9% 29.3% 18.3% 10.2% 0.0%
Share repurchases 8,603 4,488 3,062 6,076 8,696
Surplus/(Shortfall) (1,491) 3,900 5,512 2,576 482
Acquisitions 726 4,301 5,249 235 5,348
# of shares
outstanding 5109 5351 5311 5371 5577
% Growth -4.5% 0.8% -1.1% -3.7% #DIV/0!
As one can see, CSCO reported an adjusted free cash flow
deficit of nearly $1.5 billion for the last twelve months
ended 10/25/14. This is its first deficit in many years and
what is even more concerning is the fact that working
capital improvements helped boost operating cash flow by
approximately $1.2 billion over this same twelve-month
period. Additionally, this large deficit occurred despite the
fact that capital expenditures only increased by roughly $35
million, or 3%, year-over-year for the twelve months ended
10/25/14. Although CSCO continues to invest in the Cloud,
capital expenditures have stayed in a very tight range over
the last five years and the company did not project CapEx
for FY15. Another cash commitment that has been eating
into CSCO’s cash flow lately is dividends. Although CSCO
only initiated its first dividend program roughly four years
ago, the company has continued to steadily increase its
dividend, which took up approximately $3.8 billion in cash
over the last twelve months ended 10/25/14. Still, dividend
coverage is solid, as the dividend only took up about 35%
of free cash flow over the last twelve months.
However, we are particularly focused on CSCO’s share
repurchase program, which has been a heavy user of cash
over the last five twelve-month periods. For the twelve
months ended 10/25/14, share repurchases nearly doubled
year-over-year to more than $8.6 billion. This is the highest
level of repurchases at CSCO in essentially four years. Not
surprisingly due to these upped repurchases, CSCO’s
share count has been coming down in recent years. In
fact, the table above shows that CSCO’s shares
outstanding as of 10/25/14 fell by nearly 5% year-over-
year. Meanwhile, considering that CSCO’s adjusted net
income over this twelve-month period fell by approximately
6% to $9.4 billion from $10.0 billion for the same year-ago
period, the company was able to essentially keep its
adjusted EPS fairly flat year-over-year and beat
Bloomberg’s recent consensus EPS expectations, as the
following table shows:
Bloomberg’s Adjusted EPS Expectations
Quarter 10/14 7/14 4/14 1/14 10/13
Reported EPS $0.44 $0.44 $0.42 $0.36 $0.42
Bloomberg comp adj
EPS $0.54 $0.55 $0.51 $0.47 $0.53
Bloomberg estimated
EPS $0.525 $0.528 $0.477 $0.458 $0.505
Bloomberg surprise % +2.9% +4.2% +6.9% +2.6% +5.0%
Diluted wtd avg shares 5,156 5,172 5,180 5,327 5,430
With CSCO reporting an adjusted free cash flow deficit of
approximately $1.5 billion over the last twelve months
ended 10/25/14, it is not surprising that CSCO’s balance
sheet has taken a hit over the last year, as the following
table shows:
Capital Structure (in $mil)
10/14 10/13 10/12 10/11 10/10
Cash 4,387 5,254 4,773 4,747 3,796
Long Term Debt 19,615 12,947 16,272 16,264 12,214
Short Term Debt 1,357 3,279 55 589 3,064
Debt/EBITDA 1.80 1.22 1.25 1.67 1.32
Net Debt/EBITDA 1.42 0.82 0.88 1.20 0.99
As one can see, CSCO’s total debt jumped by 22% year-
over-year to nearly $21 billion over the last twelve months
ended 10/25/14, while cash levels declined by about 17%
year-over-year to $4.4 billion over the same 12-month
period. While CSCO’s current net debt-to-EBITDA ratio of
1.42 is hardly concerning, it is still at the highest level in
many years.
Still, to keep its share count from rising, CSCO must
continue to do some level of share repurchases as the
company continues to pay its officers heavily in stock. The
following table shows the dilutive impact from stock options
and restricted stock units over the last three fiscal years:
Share Dilution (in mil)
7/14 7/13 7/12
Weighted-average shares – basic 5,234 5,329 5,370
Effect of dilutive potential common
shares 47 51 34
Weighted-average shares – diluted 5,281 5,380 5,404
Antidilutive employee share-based
awards, excluded 254 407 591
Total shared-based compensation
expense $1,348 $1,120 $1,401
Meanwhile, as of 7/26/14, the total compensation cost

8
related to unvested share-based awards not yet recognized
was $2.4 billion, which is expected to be recognized over
approximately 2.3 years on a weighted-average basis. In
summary, CSCO is a tech company that has recently been
taking on larger cash restructurings, shrinking in size and
taking on debt, while spending its cash heavily on
severance packages, as well as share repurchases to help
accommodate rising executive pay. This is obviously not a
healthy development for CSCO shareholders.
GENERAL MILLS
General Mills (GIS) is a global food company and supplies
branded and unbranded food products to foodservice and
commercial baking industries. The company has taken on
a number of restructuring projects in recent fiscal years to
deliver cash savings and/or reduced depreciation. These
activities result in asset write-offs, exit charges including
severance, contract termination fees, and decommissioning
and other costs. Each restructuring action normally takes
one to two years to complete. According to its 5/25/14 10-
K,
In fiscal 2012, we recorded a $100.6 million
restructuring charge related to a productivity and cost
savings plan approved in the fourth quarter of fiscal
2012. The plan was designed to improve
organizational effectiveness and focus on key growth
strategies, and included organizational changes to
strengthen business alignment and actions to
accelerate administrative efficiencies across all of our
operating segments and support functions. In
connection with this initiative, we eliminated
approximately 850 positions globally. The
restructuring charge consisted of $87.6 million of
employee severance expense and a non-cash charge
of $13.0 million related to the write-off of certain long-
lived assets in our U.S. Retail segment. All of our
operating segments and support functions were
affected by these actions including $69.9 million
related to our U.S. Retail segment, $12.2 million
related to our Convenience Stores and Foodservice
segment, $9.5 million related to our International
segment, and $9.0 million related to our administrative
functions.
The following table summarizes the activities related to the
restructuring and other charges pursuant to the company’s
Fiscal 2012 plan related to the realignment and
restructuring of the company’s business (in millions):
Restructuring Breakout (in $mil)
Severance Contract
Termination
Other Exit
Costs
Total
Reserve, 5/11 1.7 5.5 - 7.2
2012 charges 82.4 - - 82.4
Utilized in 2012 (1.0) (2.8) 0.1 (3.7)
Reserve, 5/12 83.1 2.7 0.1 85.9
2013 charges 10.6 - - 10.6
Utilized in 2013 (74.2) (2.7) (0.1) (77.0)
Reserve, 5/13 19.5 - - 19.5
2014 charges 6.4 - - 6.4
Utilized in 2014 (22.4) - - (22.4)
Reserve, 5/14 3.5 - - 3.5
For FY14, FY13 and FY12, GIS paid $22.4 million, $79.9
million and $3.8 million, respectively, in cash related to
restructuring actions taken in fiscal 2012 and previous
years. Meanwhile, through the first six months ended
11/23/14, GIS initiated several new restructuring projects
as the most recent 10-Q detailed,
During the second quarter of fiscal 2015, we approved
Project Catalyst, a restructuring plan to increase
organizational effectiveness and reduce overhead
expense. In connection with this project, we expect to
eliminate approximately 700 to 800 positions primarily
in the United States. We expect to incur approximately
$160 million of net expenses relating to these actions
of which approximately $123 million will be cash. We
expect these actions to be largely completed by the
end of fiscal 2015.
Project Century is a review of our North American
manufacturing and distribution network to streamline
operations and identify potential capacity reductions
which we expect to complete by the end of fiscal 2017.
During the second quarter of fiscal 2015, we approved
a restructuring plan to consolidate yogurt
manufacturing capacity and exit our Methuen, MA
facility in our U.S. Retail and Convenience Stores and
Foodservice supply chains as part of Project Century.
This action will affect approximately 250 positions. We
expect to incur approximately $65 million of net
expenses relating to this action of which approximately
$17 million will be cash. We expect this action to be
completed by the end of fiscal 2016.
Also as part of Project Century, during the second
quarter of fiscal 2015, we approved a restructuring
plan to eliminate excess cereal and dry mix capacity
and exit our Lodi, CA facility in our U.S. Retail supply
chain. This action will affect approximately 430
positions. We expect to incur approximately $123
million of net expenses relating to this action of which
approximately $24 million will be cash. We expect this
action to be completed by the end of fiscal 2016.
During the first quarter of fiscal 2015, we approved a
plan to combine certain Yoplait and General Mills
operational facilities within our International segment to
increase efficiencies and reduce costs. This action will
affect approximately 240 positions. We expect to incur
approximately $15 million of net expenses relating to
this action of which approximately $14 million will be
cash. We expect this action to be completed in fiscal
2016.
The roll forward of GIS’ restructuring and other exit cost
reserves, included in other current liabilities, is as follows:
Restructuring Breakout (in $mil)
Severance Contract
Termination
Other Exit
Costs
Total
Reserve, 5/14 3.5 - - 3.5
2015 charges 168.2 0.7 0.1 169.0
Utilized in 2015 (4.0) - - (4.0)
Reserve, 11/14 167.7 0.7 0.1 168.5

9
During the six-month period ended 11/23/14, GIS paid
$10.5 million in cash related to restructuring actions. GIS
could spend another $112.5 million in cash over the second
half of FY15 to complete its Project Catalyst restructuring
plan, as well as millions of dollars more in cash to help
cover its Project Century plan. Let’s take a look at how GIS
has performed operationally in recent years since taking
these large restructurings:
LTM-11/25 FY14 FY13 FY12* FY11
Sales growth (2.5%) 0.8% 6.7% 11.9% 1.7%
Gross margin 34.3% 35.6% 36.1% 36.3% 40.0%
EBITDA margin 17.3% 19.8% 19.4% 18.6% 21.8%
* GIS acquired Yoplait International in July 2011.
As one can see, GIS’ recent operating results are hardly
encouraging. Next, let’s take a look at GIS’ adjusted free
cash flow (after covering share repurchases and dividends)
over the last five twelve-month periods ended November:
Twelve Months
Ended: 11/14 11/13 11/12 11/11 11/10
OCF before W/C
impact 2,503 2,549 2,234 2,095 2,118
Working capital
impact (108) 69 334 601 (324)
Reported OCF 2,395 2,618 2,568 2,696 1,794
CapEx 710 621 675 632 677
FCF 1,685 1,997 1,893 2,064 1,117
Dividend 997 923 835 763 697
% FCF paid in
dividends 59.2% 46.2% 44.1% 37.0% 62.4%
Share repurchases 1,850 1,430 581 411 1,420
Surplus/(Shortfall) (1,162) (355) 476 891 (1,000)
Acquisitions 822 46 1,002 1,023 0
# of shares
outstanding 597 626 646 645 641
% Growth -4.7% -3.0% 0.2% 0.7% #DIV/0!
Looking at the cash flow numbers, GIS posted an adjusted
free cash flow deficit of nearly $1.2 billion for the last twelve
months ended 11/23/14. This is the company’s second
consecutive deficit over the last two 12-month periods
ended November and third over the last five periods.
Granted, this most recent large deficit was exacerbated by
a $108 million working capital drain. Additionally, capital
expenditures jumped by 14% year-over-year to $710
million over the last twelve months ended 11/25/14 largely
due to incremental spending related to North America
supply chain actions. Management projects capital
spending will reach $750 million for FY15. Additionally,
dividends are cutting into GIS’ cash flow more, as the
company has continued to steadily increase its dividend
over at least the last four years which absorbed
approximately $1.0 billion in cash over the last twelve
months ended 11/23/14.
Still, these incremental cash drains from working capital,
capital expenditures and dividends over the last twelve
months ended 11/23/14 only combined for about $271
million, while GIS reported an adjusted free cash flow
deficit of nearly $1.2 billion. Clearly, the biggest problem is
that GIS’ share repurchase program has recently become a
huge user of cash. For the twelve months ended 11/23/14,
share repurchases increased year-over-year by 29% to
$1.85 billion, which is the highest level of repurchases at
GIS for a 12-month period ever. As a result of these heavy
repurchases, GIS’ share count has been falling noticeably
in recent years. The table above shows that GIS’ shares
outstanding as of 11/23/14 fell by nearly 5% year-over-
year. Meanwhile, considering that GIS’ adjusted net
income over this twelve-month period fell by approximately
4% to $1.70 billion from $1.78 billion for the same year-ago
period, the company was able to keep its adjusted EPS
somewhat level year-over-year and beat Bloomberg’s
consensus EPS expectations for 2Q15 ended 11/23/14, as
the following table shows:
Quarter 11/14 8/14 5/14 2/14 11/13
Reported EPS $0.847 $0.605 $0.588 $0.618 $0.82
Bloomberg comp adj
EPS $0.80 $0.61 $0.67 $0.62 $0.83
Bloomberg estimated
EPS $0.762 $0.686 $0.719 $0.615 $0.874
Bloomberg surprise % +5.0% -11.1% -6.8% +0.8% -5.0%
Diluted wtd avg shares 618.4 645.7 665.6 666.7 664.8
Thus, with GIS posting an adjusted free cash flow deficit of
approximately $1.2 billion over the last twelve months
ended 11/23/14, it is not surprising that the company’s
balance sheet has taken a hit over the last year, as the
following table shows:
11/14 11/13 11/12 11/11 11/10
Cash 895 774 735 509 566
Long Term Debt 7,713 6,741 5,572 5,248 5,864
Short Term Debt 2,822 1,904 2,761 2,581 1,182
Debt/EBITDA 3.46 2.51 2.47 2.56 2.29
Net Debt/EBITDA 3.16 2.28 2.25 2.40 2.11
As one can see, GIS’ total debt jumped by 22% year-over-
year to approximately $10.5 billion over the last twelve
months ended 11/23/14, while cash levels increased
slightly. As a result, GIS’ current net debt-to-EBITDA ratio
is now at 3.16 as of 11/23/14, compared to just 2.28 a year
ago. This is the highest level in many years for GIS and its
debt level is becoming a bigger concern.
Meanwhile, to keep its share count from rising, GIS must
and restricted stock units over the last three fiscal years:

10
5/14 5/13 5/12
Weighted-average shares – basic 628.6 648.6 648.1
Incremental share effect from:
Stock options 12.3 12.0 13.9
Restricted stock, restricted stock units,
and other 4.8 5.0 4.7
Weighted-average shares – diluted 645.7 665.6 666.7
Anti-dilutive stock options and restricted
stock units, excluded 1.7 0.6 5.8
expense $107.0 $128.9 $124.3
Thus, average diluted shares outstanding decreased by 20
million in FY14 from FY13 due primarily to the repurchase
of 36 million shares, partially offset by the issuance of 7
million shares related to stock compensation plans.
Meanwhile, as of 5/25/14, unrecognized compensation
expense related to non-vested stock options and restricted
stock units was $117.2 million. This expense will be
recognized over 17 months, on average. To summarize,
GIS is a packaged food company with a history of
restructurings that has recently taken on several large
restructuring projects. Not only does it appear that GIS will
be laying off more employees and spending cash on more
severance packages, but it will likely continue to take on
even more debt as it repurchases shares to boost EPS
growth as well as to help accommodate generous
executive pay. This is certainly not a development that GIS
shareholders should continue to endorse.
COCA-COLA
The Coca-Cola Company (KO) manufactures, markets, and
distributes soft drink concentrates and syrups. The
company also distributes and markets juice and juice-drink
products. KO distributes its products to retailers and
wholesalers in the United States and internationally.
Throughout the years, KO has been involved in a number
of productivity, integration and restructuring initiatives.
According to its 2013 10-K,
In February 2012, the Company announced a four-
year productivity and reinvestment program which will
further enable our efforts to strengthen our brands and
reinvest our resources to drive long-term profitable
growth. This program will be focused on the following
initiatives: global supply chain optimization; global
marketing and innovation effectiveness; operating
expense leverage and operational excellence; data
and information technology systems standardization;
and further integration of CCE's former North America
business.
The Company incurred total pretax expenses of $764
million related to this program since the plan
commenced. These expenses were recorded in the
line item other operating charges in our consolidated
statement of income. Refer to Note 19 for the impact
these charges had on our operating segments.
Outside services reported in the table below primarily
relate to expenses in connection with legal,
outplacement and consulting activities. Other direct
costs reported in the table below include, among other
items, internal and external costs associated with the
development, communication, administration and
implementation of these initiatives; accelerated
depreciation on certain fixed assets; contract
termination fees; and relocation costs.
The following table summarizes the balance of accrued
expenses related to these productivity and reinvestment
initiatives and the changes in the accrued amounts since
the commencement of the plan:
Productivity and Reinvestment Breakout (in $mil)
Severance
Pay and
Benefits
Outside
Services
Other
Direct
Costs
Total
2012
Costs incurred 21 61 188 270
Payments (8) (55) (167) (230)
Noncash and
exchange (1) - (13) (14)
Balance, 12/12 12 6 8 26
2013
Payments (113) (59) (209) (381)
Noncash and
exchange 1 - (28) (27)
Balance, 12/13 88 6 18 112
Additionally, in 2008, KO began an integration initiative
related to the 18 German bottling and distribution
operations acquired in 2007. KO incurred charges of $15
million and $52 million related to these other restructuring
initiatives during 2012 and 2011, respectively. These other
restructuring initiatives were outside the scope of the
productivity and reinvestment, productivity and integration
initiatives discussed above and were related to individually
insignificant activities throughout many of KO’s business
units. These charges were recorded in the line item other
operating charges.
Meanwhile, KO expanded its productivity and reinvestment
program in 2014, as the 3Q14 10-Q noted,
In February 2014, the Company announced that we
are expanding our productivity and reinvestment
program to drive an incremental $1 billion in
productivity by 2016 that will primarily be redirected
into increased media investments. Our incremental
productivity goal consists of two relatively equal
components. First, we will expand savings through
global supply chain optimization, data and information
technology systems standardization, and resource and
cost reallocation. These savings will be reinvested in
global brand-building initiatives, with an emphasis on
increased media spending. Second, we will increase
the effectiveness of our marketing investments by
transforming our marketing and commercial model to
redeploy resources into more consumer-facing
marketing investments to accelerate growth.
As of September 26, 2014, the Company has incurred
total pretax expenses of $1,023 million related to our

11
productivity and reinvestment program since the plan
commenced.
The following table summarizes the balance of accrued
expenses related to these productivity and reinvestment
initiatives and the changes in the accrued amounts as of
and for the nine months ended 9/26/14:
Severance
Pay and
Benefits
Outside
Services
Other
Direct
Costs
Total
Balance, 12/13 88 6 18 112
Payments (77) (55) (162) (294)
Noncash and
exchange (1) - (23) (24)
Balance, 9/14 36 3 14 53
Meanwhile, KO incurred expenses of $34 million and $142
million related to the bottling and distribution initiative
during the three and nine months ended 9/26/14,
respectively, and has incurred total pretax expenses of
$769 million related to this initiative since it commenced.
These charges were recorded in the line item other
operating charges in our condensed consolidated
statements of income and impacted the Bottling
Investments operating segment. The expenses recorded in
connection with these integration activities have been
primarily due to involuntary terminations. KO had $124
million and $127 million accrued related to these integration
costs as of 9/26/14 and 12/31/13, respectively.
To summarize, just focusing on the 2012 and 2014
productivity and reinvestment initiatives, KO has made
cash payments of $294 million, $381 million and $230
million, respectively, for the nine months ended 9/26/14,
2013, and 2012, respectively. Thus, these sizeable cash
payments appear to be trending even higher over the last
few years and are putting additional strain on KO’s
operating cash flow. So just how well has KO performed
operationally in recent years since taking these large
restructurings:
LTM-9/14 2013 2012 2011* 2010
Sales growth (2.3%) (2.4%) 3.2% 32.5% 13.3%
Gross margin 61.3% 60.7% 60.3% 60.9% 63.9%
EBITDA margin 26.8% 26.0% 26.6% 26.1% 28.2%
* KO acquired the North American bottling operations of Coca-Cola
Enterprises in October 2010.
While one can see some slight margin improvement in
recent quarters, KO’s recent operating results are hardly
inspiring. Next, let’s take a look at KO’s adjusted free cash
flow (after covering share repurchases and dividends) over
the last five twelve-month periods ended September:
Twelve Months
Ended: 9/14 9/13 9/12 9/11 9/10
CFO before W/C
impact 11,590 11,407 11,570 10,706 9,406
Working capital
impact (781) (890) (1,059) (1,598) (266)
Cash from ops 10,809 10,517 10,511 9,108 9,140
CapEx 2,543 2,434 2,976 2,795 1,929
Free cash flow 8,266 8,083 7,535 6,313 7,211
Dividend 5,155 4,785 4,445 3,193 3,984
% FCF paid in
dividends 62.4% 59.2% 59.0% 50.6% 55.2%
Surplus/(Shortfall) (792) (1,534) (1,434) (3,446) 1,712
Acquisitions 370 695 1,833 1,023 1,812
# of shares
outstanding
4375 4416 4486 4542 4630
% Growth -0.9% -1.6% -1.2% -1.9% #DIV/0!
Looking at cash flow, KO posted an adjusted free cash flow
deficit of nearly $800 million for the last twelve months
ended 9/26/14. Ominously, this marks the company’s
fourth consecutive deficit over the last four 12-month
periods ended September. Granted, adjusted free cash
flow would have come in about break-even over the last
twelve months if not for a $781 million drain from working
capital adjustments. Additionally, capital expenditures
increased by 4% year-over-year to more than $2.5 billion
over the last twelve months ended 9/26/14 due to
investments in new cooler placements, route-to-market
enhancements, brand and packaging innovation. Still,
management projects capital spending will finish around
$2.5 billion for all of 2014, which will be the third
consecutive year in which CapEx will have declined from
$2.92 billion in 2011. Meanwhile, dividends continue to
absorb more of KO’s cash flow, as the company has been
steadily increasing its dividend in recent years and took up
months ended 9/26/14. Dividends have taken up more of
free cash flow over the last two years, accounting for
roughly 62% of free cash flow over the last twelve months
ended 9/26/14.
Still, we are most concerned about KO’s massive share
repurchase program, which has continued to drive adjusted
free cash flow deficits over the last four 12-month periods
ended September. For the twelve months ended 9/26/14,
share repurchases declined year-over-year by 19%, but still
came in at a large $3.9 billion. Meanwhile, despite heavy
repurchases over the last four years, KO’s share count has
not fallen much. The table above shows that KO’s shares
outstanding as of 9/26/14 fell by just 1% year-over-year.
However, considering that KO’s adjusted net income over
this same twelve-month period fell by 2% to approximately
$9.2 billion from $9.4 billion for the year-ago period, the
company was able to keep its adjusted EPS essentially flat
year-over-year and beat Bloomberg’s consensus EPS
expectations for 3Q14, as the following table shows:

12
Quarter 9/14 6/14 3/14 12/13 9/13
Reported EPS $0.525 $0.618 $0.408 $0.421 $0.50
Bloomberg comp adj EPS $0.53 $0.64 $0.44 $0.46 $0.53
Bloomberg estimated EPS $0.527 $0.633 $0.441 $0.463 $0.533
Bloomberg surprise % +0.6% +1.1% -0.2% -0.7% +0.2%
Thus, with KO posting steady adjusted free cash flow
deficits over the last four twelve-month periods ended
September, it is not surprising that the company’s balance
sheet has steadily deteriorated over this same period, as
the following table shows:
9/14 9/13 9/12 9/11 9/10
Cash 11,084 11,118 9,615 12,682 10,509
Long Term Debt 20,111 14,173 16,181 13,708 4,456
Short Term Debt 21,699 22,034 16,549 15,480 8,937
Debt/EBITDA 3.38 2.95 2.61 2.58 1.30
Net Debt/EBITDA 2.48 2.05 1.84 1.46 0.28
Looking at these numbers, it is pretty shocking to see that
KO’s total debt has more than tripled in just four years,
while cash levels have remained essentially flat. As a
result, KO’s current net debt-to-EBITDA ratio is now at 2.48
as of 9/26/14, compared to just 0.28 four years ago. This
ratio is easily at record levels for KO and the company’s
once-pristine balance sheet is simply no longer.
Meanwhile, to keep its share count from rising, KO must
and restricted stock units over the last three years:
12/13 12/12 12/11
Average shares outstanding 4,434 4,504 4,568
Effect of dilutive securities 75 80 78
Average shares outstanding assuming
dilution 4,509 4,584 4,646
Anti-dilutive stock option awards,
excluded 28 34 32
expense $227 $259 $354
Thus, KO’s number of shares outstanding decreased by
roughly 67 million in 2013 from 2012 due primarily to the
repurchase of 121 million shares, partially offset by the
issuance of 54 million shares related to stock
compensation plans. Meanwhile, as of 12/31/13, KO had
$416 million of total unrecognized compensation cost
related to non-vested share-based compensation
arrangements granted under its plans. This cost is
expected to be recognized over a weighted-average period
of 1.8 years as stock-based compensation expense.
Last March, David Winters, CEO of Wintergreen Advisors,
heavily criticized KO’s pay plan for its executives that would
transfer roughly $13 billion to management over the next
four years. Winters urged Warren Buffett, whose
Berkshire-Hathaway (BRK/A) is KO’s largest shareholder
with about a 9% interest, to vote against the plan.
However, while Buffett called the plan “excessive” in a
4/23/14 interview with CNBC, Buffet noted that Berkshire
abstained from voting against it because he didn’t want to
express disapproval of the company’s management.
Buffett gave the pathetic excuse that he had never heard
anyone speak out against a compensation committee’s
plan in 55 years of serving on boards, saying,
“Taking them on is a little like belching at the dinner
table. You can’t do it too often.”
Mr. Buffett, please enjoy being the largest shareholder of a
company that is not growing, is continually restructuring, is
becoming less profitable, is reducing capital investment,
and is taking on more and more debt so as to keep its
executives grossly over-compensated.
PHILIP MORRIS INTERNATIONAL
Spun off from Altria Group (MO) in March 2008, Philip
Morris International (PM), through its subsidiaries, affiliates
and their licensees, produces, sells, distributes, and
markets a wide range of branded cigarettes and tobacco
products in markets outside of the United States of
America. The Company's portfolio comprises both
international and local brands. Over the years, PM has
recorded a number of separation program and contract
termination charges. According to PM’s 2013 10-K,
Separation Programs: PMI recorded pre-tax
separation program charges of $51 million, $42 million
and $63 million for the years ended December 31,
2013, 2012 and 2011, respectively. The 2013 pre-tax
separation program charges primarily related to the
restructuring of global and regional functions based in
Switzerland and Australia. The 2012 pretax separation
program charges primarily related to severance costs
associated with factory restructurings. The 2011 pre-
tax separation program charges primarily related to
severance costs for factory and R&D restructurings.
Contract Termination Charges: During 2013, PMI
recorded exit costs of $258 million related to the
termination of distribution agreements in Eastern
Europe, Middle East & Africa (due to a new business
model in Egypt) and Asia. During 2012, PMI recorded
exit costs of $13 million related to the termination of
distribution agreements in Asia. During 2011, PMI
recorded exit costs of $12 million related to the
termination of a distribution agreement in Eastern
Europe, Middle East & Africa.

13
The movement in exit cost liabilities for PM was as follows:
Exit Cost Breakout (in $mil)
Balance, 12/11 28
Charges 55
Cash spent (57)
Currency/other (6)
Balance, 12/12 20
Charges 309
Cash spent (21)
Currency/other -
Balance, 12/13 308
Charges 370
Cash spent (263)
Currency/other (48)
Balance, 9/14 367
As one can see, cash payments from these restructurings
have increased noticeably just over the last nine months
ended 9/30/14. These higher payments have certainly put
additional pressure PM’s operating cash flow lately.
Meanwhile, let’s see how PM has performed operationally
in recent years since taking these large restructurings:
LTM-9/14 2013 2012 2011 2010
Sales growth (3.1%) (0.5%) 0.9% 14.3% 8.7%
Gross margin 65.7% 66.7% 66.9% 65.7% 64.3%
EBITDA margin 43.6% 46.1% 47.0% 46.1% 44.6%
As one can see, PM’s margins have remained fairly flat
over the last few years, while sales growth has been
negative for about the last two years. Next, let’s take a
look at PM’s adjusted free cash flow (after covering share
repurchases and dividends) over the last five twelve-month
periods ended September:
Twelve Months
Ended: 9/14 9/13 9/12 9/11 9/10
CFO before W/C
impact 9,427 10,157 9,756 9,726 7,951
Working capital
impact (722) (692) (1,024) 1,423 1,370
Cash from ops 8,705 9,465 8,732 11,149 9,321
CapEx 1,183 1,158 1,048 798 715
Free cash flow 7,522 8,307 7,684 10,351 8,606
Dividend 5,989 5,633 5,320 4,610 4,369
% FCF paid in
dividends 79.6% 67.8% 69.2% 44.5% 50.8%
Surplus/(Shortfall) (2,964) (3,809) (3,198) 207 (993)
Acquisitions 0 0 0 121 36
# of shares
outstanding 1556 1606 1676 1740 1818
% Growth -3.1% -4.2% -3.7% -4.3% #DIV/0!
Excluding working capital adjustments, PM’s operating
cash flow declined by 7% year-over-year for the twelve
months ended 9/30/14. This decline in cash flow was
blamed largely on a currency hit. Meanwhile, PM posted
an adjusted free cash flow deficit of nearly $3 billion for the
last twelve months ended 9/30/14. Ominously, this marks
the company’s fourth deficit over the last five 12-month
periods ended September. Even excluding the roughly
$722 million drain from working capital adjustments,
adjusted free cash flow would have come in down over
$2.2 billion for the last twelve months. Additionally, capital
expenditures increased by 2% year-over-year to about $1.2
billion over the last twelve months ended 9/30/14.
Meanwhile, management projects capital spending will
continue to pick up in 2H14 due to the commercialization of
Reduced-Risk Product, roll out of Marlboro Red 2.0 and
some underlying cost related to the optimizations of its
manufacturing footprint. Meanwhile, dividends continue to
absorb more of PM’s cash flow, as the company has been
steadily increasing its dividend in recent years and took up
months ended 9/30/14. Dividends have taken up
noticeably more of free cash flow in recent years,
accounting for roughly 80% of free cash flow over the last
twelve months ended 9/30/14.
Once again for this exercise, we are most concerned about
PM’s massive share repurchase program, which has
continued to drive huge adjusted free cash flow deficits
over the last three 12-month periods ended September.
For the twelve months ended 9/30/14, share repurchases
declined year-over-year by 31%, but still came in at a large
$4.5 billion. Share buyback activity is expected to slow
slightly in 4Q14, as PM targets total repurchases at $4
billion for 2014. For 2015, repurchases are projected to
come down even further to the $2 billion to $3 billion range.
Meanwhile, despite heavy repurchases over the last four
years, PM’s share count has only declined moderately.
The table above shows that PM’s shares outstanding as of
9/30/14 fell by just 3.1% year-over-year. However,
considering that PM’s adjusted net income over this same
twelve-month period fell by 3% to approximately $8.5 billion
from $8.7 billion for the year-ago period, the company was
able to keep its adjusted EPS nearly flat year-over-year
and handily beat Bloomberg’s consensus EPS
expectations for 3Q14, as well as for the prior four quarters,
as the following table shows:
Quarter 9/14 6/14 3/14 12/13 9/13
Reported EPS $1.378 $1.413 $1.191 $1.347 $1.441
Bloomberg comp adj EPS $1.39 $1.41 $1.19 $1.37 $1.44
Bloomberg estimated EPS $1.334 $1.243 $1.163 $1.367 $1.433
Bloomberg surprise % 4.2% 13.4% 2.3% 0.2% 0.5%
With PM posting steady adjusted free cash flow deficits
over the last three twelve-month periods ended September,
it is not surprising that the company’s balance sheet has
taken a sizeable hit over this same period, as the following
table shows:

14
9/14 9/13 9/12 9/11 9/10
Cash 2,043 3,382 4,817 3,391 3,507
Long Term Debt 25,395 21,877 17,520 12,870 13,595
Short Term Debt 3,448 4,923 4,916 4,889 3,852
Debt/EBITDA 2.18 1.86 1.55 1.26 1.48
Net Debt/EBITDA 2.02 1.62 1.22 1.02 1.18
Shareholders’ Equity (8,677) (5,908) 116 3,654 6,122
Looking at these numbers, PM’s total debt has nearly
doubled in just four years, while cash levels have dropped
to historically-low levels. As a result, PM’s current net debt-
to-EBITDA ratio is now at 2.02 as of 9/30/14, compared to
just 1.18 four years ago. This ratio is easily at record levels
for PM since the spin-off. Meanwhile, with its heavy
restructurings, it is hard not to notice that PM’s total
liabilities outweigh total assets now, as the company has
reported negative shareholders’ equity for roughly two
years now. In just four years, PM’s equity balance has
gone from approximately $6.1 billion at 9/30/10 to a
negative $8.7 billion at 9/3014. Thus, PM’s once healthy
balance sheet is now under noticeable strain.
Meanwhile, although PM continues to grant restricted stock
and deferred stock awards, the company’s share count
from assumed conversions has not been materially
impacted. Without this dilutive impact that we have seen
from prior company examples, there is less pressure on PM
to repurchase shares. To summarize, PM is a leading
tobacco company that was only spun off seven years ago
yet already has a history of restructurings. Not only does it
appear that PM will continue to restructure operations as it
tries to regain earnings growth, but it could take on even
more debt as it repurchases shares to bolster EPS.

15
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Jeffery B. Middleswart (214) 378-4186
Bill E. Whiteside, CFA (682) 224-5715
William N. Becker (636) 821-1319
Jeffrey N. Dalton (214) 378-4176
Rob Peebles, CFA (214) 378-4183
JR Riddlehoover, CPA (817) 447-7067

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