Editor's Note: Herb Greenberg's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Feb. 11 on RealMoney.

Will the real free cash flow at EDS ( EDS) please stand up?

In its earnings press release Thursday, EDS crowed about its free cash flow for the fourth quarter of 2001, saying it rose to $453 million from $359 million a year earlier.

What EDS doesn't say is that the definition of free cash flow in the news release is different from the one it gave in its conference call a year ago. EDS didn't mention free cash flow in its year-ago earnings release -- a company spokesman said there wasn't much interest in it at the time -- but it did mention free cash flow in CFO James Daley's prepared presentation on Feb. 7, 2001, a presentation that is still on EDS' Web site. According to that definition, free cash flow is described as cash flow from operations adjusted for investment activities. Last February the company said free cash flow was $160 million for the fourth quarter of 2000.

Fast forward to its most recent earnings release, and the definition has changed to the more commonly used definition of operating cash flow adjusted for capital spending.

Why did the company make the change, and what would the apples-to-apples comparison, using last year's definition, look like? A spokesman said he'd try to get an answer but didn't call me back by the end of Friday. The company is entertaining analysts today.

Investors are focused on free cash flow at all companies now, because, in some ways even more than even earnings, free cash flow shows the company's true financial health.

Under the new definition, the number for a year ago is much higher than the company originally reported.

That's not all: Even with the new definition, it's not easy to find what free cash flow really is by just reading the cash-flow statement. While EDS says free cash flow is $453 million, if an investor were to do the free-cash-flow calculation from the numbers available on EDS' cash-flow statement (without asking EDS for help), free cash flow would appear to be more like $439 million. That's done by deducting from operating cash flow the line item of $329 million for "payments for purchases of property and equipment." (Payments for purchases of property and equipment sounds a lot like capital spending to me!) And where does that leave another line item of $59 million for purchases of software, which also sounds to me like capital spending?

EDS, in response to my query, says that capital spending was $315 million. A spokesman further adds in an email response to my question that plant, property and equipment "is the primary component of our capital expenditures. The $14 million (or 4%) difference between $315 million and $329 million is the net of proceeds from investments and other assets; payments for investments and other assets; payments for purchase of software and other intangibles; and other (primarily proceeds from disposal of PP&E). All of these categories involve technology-related assets, thus are included in our capital expenditure calculation -- this is consistent with the methodology we've used historically" to calculate capital spending.

That may be the methodology EDS has historically used, but it is a lot less clear than the method used by other companies. Most companies include some kind of number on the cash-flow statement representing capital spending -- a number that is easily subtracted from operating cash flow to arrive at free cash flow, without the need for further elaboration or conversations with the company.

And you wonder why short-sellers I have spoken to think the quality and quantity of EDS' cash flow leaves something to be desired?
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to Herb Greenberg. Greenberg also writes a monthly column for Fortune.

Brian Harris and Mark Martinez assisted with the reporting of this column.

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